Greg Snyder – Director, IR Mark McGettrick – CFO Tom Farrell – Chairman, President and CEO Gary Sypolt – CEO, Dominion Energy

Hugh Wynne -- Sanford Bernstein Paul Patterson -- Glenrock Associates Andrew Wessel [ph] -- Macquarie Capital Greg Gordon -- Morgan Stanley Nathan Judge -- Atlantic Equities Dan Eggers -- Credit Suisse

Good morning and welcome to Dominion's second quarter earnings conference call. On the call today we have Tom Farrell, CEO; and other members of senior management.

Good morning and welcome to Dominion's second quarter earnings conference call. During this call, we will refer to certain schedules included in this morning's earnings release and pages from our second quarter earnings release kit. Schedules in the earnings release are intended to answer the more detailed questions pertaining to operating statistics and accounting. Investor Relations will be available after the call for any clarification of these schedules. While we encourage you to call with questions in the time permitted after our prepared remarks we ask that you use the time to address questions of a strategic nature or those related to third quarter 2009 guidance or 2010 outlook. If you have not done so, I encourage you to visit our Web site, register for e-mail alert and view our second quarter 2009 earnings documents. Our Web site is www.dom.com/investors. In addition to the earnings release, we also have added a slide presentation that will guide this morning's discussion that can be accessed through our Web site. And now, for the usual cautionary language. The earnings release and other matters that will be discussed on the call today may contain forward-looking statements and estimates that are subject to various risks and uncertainties. Please refer to our SEC filings, including the most recent annual report on Form 10-K and our quarterly report on Form 10-Q, for a discussion of factors that may cause results to differ from management's projections, forecasts, estimates, and expectations. Also on this call, we will discuss some measures about our company's performance that differ from those recognized by GAAP. Those measures include our third quarter and full year 2009 operating earnings guidance and our outlook for 2010, as well as operating earnings before interest and tax, commonly referred to as EBIT. Reconciliation of such measures to the most directly comparable GAAP financial measures we are able to calculate and report are contained in our earnings release kit. I will now turn the call over to our Chief Financial Officer, Mark McGettrick.

Thank you, Greg, and good morning everyone. Joining me on the call this morning is our CEO Tom Farrell; and recently appointed heads of our principal business units, Dave Christian from Dominion Generation; Gary Sypolt from Dominion Energy; and Paul Koonce, who moved from Dominion Energy to lead Dominion Virginia Power. Tom Farrell will update you on regulatory proceedings and other operational and strategic issues following my overview of second quarter financial results, third quarter operating earnings guidance, and our revised outlook for 2010. We will then be happy to answer your questions. Dominion had a strong second quarter. Operating earnings were $0.68 per share, $0.02 above the upper end of our quarterly guidance range. We were also able to add to our 2010 hedge positions at levels that support our operating earnings outlook. In addition, we added to our 2011 Millstone and natural gas production hedge positions, which is consistent with our stated strategy of averaging in hedges for these assets over time. We have also completed nearly all of our 2009 financing needs with several successful transactions last quarter. You can find a complete reconciliation of operating earnings compared to quarterly guidance on pages 33 to 39 of the earnings release kit. GAAP earnings were $0.76 per share for the second quarter. The major difference between GAAP and operating earnings was related to a downward revision in our nuclear decommissioning asset retirement obligation for Millstone Unit One. A reconciliation of GAAP to operating earnings can be found on Schedules 2 and 3 of the earnings release kit. Now I'll review the second quarter operating results for our individual business units. The details of these results are also included in your earnings release kit. I'll begin with Dominion Virginia Power. Second quarter 2009 EBIT for Dominion Virginia Power was near the midpoint of our guidance range. Kilowatt hour sales were down 2% from the second quarter of 2008. While lower than last year, these results compare favorably with the Mid-Atlantic region, where power demand was down about 6% for the quarter, and the country as a whole, where demand was down about 5%. Offsetting the sales decline were higher electric rate rider and military privatization revenues. Although sales to industrial customers continue to be down compared to last year, weather adjusted sales to residential and commercial customers have held up well. Last quarter we told you that our earnings sensitivity was about $0.035 per share less than we originally forecasted for 2009 if the sales variance experienced in the first quarter were to carry through for the remainder of the year. Using that same logic to the second quarter, the sensitivity for the remainder of the year has declined to less than $0.02 per share. Second quarter EBIT for Dominion Energy was in the upper half of our guidance range. Higher than expected transportation and storage revenues as well as sales of other products and services at gas transmission were key contributors to the strong performance. Finally, at Dominion Generation, second quarter EBIT was also in the upper half of our guidance range. Strong performance was driven by lower than expected planned outage and O&M expenses in our regulated generation fleet and higher than expected margins in our merchant fleet. Overall, we are very pleased with our operating results for the second quarter. Now, moving to cash flow and treasury activities. Cash from operations was $425 million in the second quarter and $1.9 billion for the first six months of the year. Cash flow has exceeded our expectations and has had a positive impact on our financing needs. Some of the strength in cash flow is from sources that are temporary in nature, such as a recovery of a significant amount of our deferred fuel balance. Liquidity was also very strong at $3.8 billion. For statements of cash flow and liquidity, please see pages 17 and 53 of our earnings release kit. We successfully completed the number of financing transactions during the quarter. We raised $685 million through an offering of hybrid securities targeted toward retail investors. The rating agencies impute an equity credit equivalent of at least 50% of the principal amount of these securities. We also raised $350 million through our Virginia Power ten-year senior notes offering. We were extremely pleased to see the extent to which credit spreads had improved, tightening from over 400 basis points at the height of the financial market crisis to just 138 basis points when we issued these notes. When you combine with the benefits of a pre-issuance hedge, our 5% coupon was reduced to an effective interest rate of 4.27% for this 10-year debt. We entered into pre-issuance hedges on treasury rates earlier this year at very attractive levels for the vast majority of our anticipated debt issuance for 2009 and 2010. Also, the percentage of debt tied to variable rates is much lower than our target because of our low levels of commercial paper outstanding. For that reason, we entered into fixed floating swaps on $500 million of our fixed rate debt to capitalize on the significant initial positive carry and take advantage of our view that short-term rates will remain at relatively low levels in the near term. Our equity needs are largely satisfied for the year and are very modest for 2010. We reported on our last call that we had raised $250 million of equity from external sources. The only equity left for the balance of the year is a modest amount from our dividend reinvestment and direct stock purchase plans. In 2010, we expect to raise $250 million from the automatic issuance plans and only need about $150 million from market issuances. For the balance of this year, our financing plans include $500 million to $800 million of debt at Dominion. If cash flow continues to remain strong, we expect to come in at the low end of that range. Now to the third quarter and our outlook for 2009 and 2010, Dominion expects third quarter 2009 operating earnings in the range of $0.88 to $0.93 per share, compared to operating earnings of $0.94 per share in the third quarter of 2008. Complete details of the company's third quarter 2009 guidance can be found on pages 40 to 46 of Dominion's earnings release kit. Favorable drivers in our forecast for the third quarter compared to the third quarter of 2008 include the impact of changes to base rates, revenues from the Cove Point expansion project, and a lower effective income tax rate. Unfavorable factors again relative to the third quarter of 2008 include the effects of mild weather in July, higher interest expense, and lower gas and oil production in the company's E&P operations resulting from the expiration of overriding royalty interest associated with former VPP agreements. While annual guidance is based on the assumption of normal weather, the weather in July was milder than normal in Virginia, as it was in much of the Eastern half of the country. We do not yet have the final sales figures for the month. However, we believe that assuming normal weather for the rest of the quarter, our results will fall within our guidance range. In addition, we experienced an unplanned outage at Millstone Unit Two in July. The unit had been running at 100% capacity factor for the year and even with this outage, our nuclear fleet should still meet its targeted availability for the year. The costs of this outage are also included in our third quarter guidance range. With our strong results for the first half of the year, and our forecast for the third quarter, we are able to affirm our 2009 operating earnings guidance of $3.20 to $3.30 per share. Let me turn to 2010. While it is certainly possible for us to earn within our original range, we think it is prudent at this time to update our operating earnings outlook for 2010 from a range of $3.33 to $3.50 per share to a range of $3.20 to $3.40 per share. While the economy is showing signs of stabilizing, the timing and strength of economic recovery along with its impact on commodity prices and financing costs remains uncertain at this time. Tom Farrell will discuss in more detail our pending request for higher base rates for Virginia Power. We have updated our filing to comply with two recent commission rulings and a number of other issues. Our updated outlook for 2010 incorporates a range of potential outcomes from these factors as well as our ability to manage operating expenses. Many of the questions we get about our operating earnings outlook relate to hedging and commodity prices. Our 2010 outlook still incorporates a range of natural gas prices of $6.75 to $7.25 per million BTU. Since our last earnings call on April 30th, we have taken steps to reduce our sensitivity to 2010 commodity prices. We have been able to transact at levels that support our outlook even in a generally bearish commodity market. We have added to our 2010 hedge positions for Millstone, our New England fossil assets, and natural gas production. As was the case in our previous activity, the timing of these new hedges was weighted toward the first half of the year. The current low power price environment in New England has enabled us to make market purchases during certain times of the day to meet existing power hedges at similar margins, allowing us to bank very low cost coal for consumption in 2010. This has also allowed us to postpone certain low cost coal deliveries into 2010. The result for us is a below market cost of coal for 2010. That in turn enables us to capture spark spreads from these new hedges that are consistent with the commodity price view that is incorporated in our operating earnings outlook. This highlights our flexibility in achieving our hedging targets. Overall, our sensitivity to $1 move in natural gas prices in 2010 is now only about $0.11, down from $0.15 per share in April. Although the range of natural gas prices reflected in our 2010 outlook is above current forward market levels, we have reasons to be somewhat optimistic about the recovery of prices as the economy begins to grow. Those of you who follow the market know that the rig count is down about 60% from its peak. We are beginning to see the effects of this in the reports on domestic production. Gas prices could decline even further near term as storage inventories reach record levels and restrictions are imposed by system operators. As a result, the rig count may continue its downward trend short-term until gas prices begin to rise. It will likely take a fairly sustained price signal above current market prices to support a resumption of the level of drilling that is necessary to offset domestic production decline rates, meet demand, and fill storage next year. On the other hand, should the current recession extend beyond 2009, we should expect natural gas prices to remain lower. However, in this scenario, we would also expect to continue to experience less inflation in non fuel O&M expenses and lower cost borrowing costs than we have included in our outlook. There will undoubtedly continuing opportunities to arbitrage between commodities as long as there is volatility in the marketplace. Also, the hedges we have put in place for 2010 tend to be weighted toward the first half of the year. This provides greater protection during the recession extending into next year, while still providing the opportunity to participate in the upside later next year as the economy gains strength. As we have said before, it is important to examine the dynamics of our entire business model when estimating Dominion's future earnings prospects rather than focusing on a single isolated sensitivity. I will now turn the call over to Tom Farrell for an update on operational, regulatory, and strategic issues.

Good morning, everyone and thank you for joining us. As I have done in our previous calls, I will begin with a brief update on our safety and operational performance. Safety has been and will continue to be one of our core values. I am pleased to report that across every one of our business units, measures of safety performance improved in the second quarter over the prior quarter and over the same period last year. Dominion includes operational excellence as another core value. During the second quarter, our nuclear fleet achieved a net capacity factor, excluding refueling outages, of 100%. We completed a refueling outage at Suri Unit One in 23 days, a station and fleet record. As of July 3rd, Millstone Unit Two had been online for 368 days when it had to shut down to repair a small leak in the reactor cooling system. It returned to service last week. We still expect our nuclear fleet to meet its full year operational expectations. Operations at our coal and combined cycle merchant plants were also excellent during the quarter, with an equivalent forced outage rate of 3.9%. Dominion Energy also had a strong quarter. On April 1, Dominion Transmission began providing storage service from its 4.4 Bcf USA storage project and placed the Cove Point expansion project into commercial service. DTI achieved a year-to-date reliability rate of 99.8% at its Hastings extraction plant and delivered 7% more wet gas volume this second quarter compared to the same quarter last year. Our E&P team drilled 103 wells in the second quarter and 165 wells in the first half of the year, without a single dry hole. Well costs have declined 15% this year and are down about 25% since this time last year. Our second quarter 2009 lifting costs have declined by 7% to $1.26 per Mcfe from $1.35 a year ago. Our DD&A rate has also dropped but by 29% from last year to $1.39 per Mcfe from $1.97, all of these excluding VPP volumes. At Virginia Power, we reduced our average minutes out, excluding major storms, to 114 minutes for the rolling 12 months ending June 2009 from 120 minutes at the end of the first quarter. We also improved our response time on customer calls and made several improvements in our ability to respond to customer inquiries. We continue to make progress on our infrastructure growth projects. In our regulated Virginia Power fleet, we added another 24 megawatts in May through upgrades at one of our peaking facilities. Since September 2007, we have added 784 megawatts of capacity as part of our Powering Virginia growth plan. We commenced construction of the Bear Garden power station on April 1. The Virginia City Hybrid Energy Center is now over one-third complete. Both projects are on schedule and on budget. As you recall, both projects earn enhanced rates of return. On the merchant side, as of May, all of the chiller system upgrades as Fairless Works were complete. This added 60 megawatts to the station's capacity in the second quarter, bringing the total upgrades completed over the last year to 120 megawatts. We also began construction on one of our major environmental projects, the addition of two natural direct cooling towers at our Brayton Point generating station. On the nuclear front, we are pleased with the interest and participation of the vendors in the first comprehensive competitive solicitation for a new nuclear unit by a utility company in the United States. We have been talking to a number of vendors since January and have received six proposals in response to the RFP we made in March. We are currently evaluating these and anticipate making a decision by the end of the year. In the renewable growth arena, Dominion has reached an agreement with BP Wind Energy to split the development assets of Phase II of the Fowler Ridge Wind Farm. Dominion will develop 15 megawatts of additional wind capacity at the site and BP will retain the remaining 200 megawatts. We expect to close that transaction in the fourth quarter. We began construction on our Meadowbrook-to-Loudoun 500kV transmission line, which is part of our $900 million transmission enhancement program over the next two years. We have installed over 91 structures and 15 miles of 500kV conductor. We also began clearing the Carson to Suffolk line. Both of these projects, which also earn enhanced rates of return, are on schedule for completion in 2011. Finally, on July 16, we received an order from FERC authorizing the upgrade, modification, and expansion of the Cove Point pier. Now, a few comments on our regional economy. The health and direction of the nation's economy continues to be of major concern to everyone. Last quarter we told you that because of the low industrial concentration in our service territory, Dominion's earnings are much less sensitive to changes in the economy than they are to the effects of weather. We also benefit from the stable revenues from the unusually high governmental and military presence throughout our service territory. Weather normalized regulated electric sales for the second quarter were down 2% over the second quarter of 2008 because of lower industrial demand, but regulated electric based revenue was down only 0.5%. Revenues actually increased nearly 2% when you include the impact of rider revenue from our growth projects. So while Dominion has been affected by the economic downturn, its impact has been mitigated by our customer mix and the relative economic strength of our service territory, particularly when compared to other companies. Also on our first quarter call, we told you there were signs that the Virginia economy had hit bottom. That is still the case. Unemployment, which nationally was 9.7% in June, on its way certainly above 10%, was only 7.3% in Virginia as a whole and just 6.7% in our service territory. New connects for the first half of the year were 14,665, which is on pace with our annual forecast of about 30,000. A recent CNBC survey ranked Virginia as the number one state in the nation doing business in 2009, the second time in the three years of this survey. We believe as we exit this year we will see increasing weather normalized sales and continued revenue growth at Virginia Power. I want to update you on the progress in our various regulatory proceedings. As we told you in last quarter's call, we filed the base rate case seeking the first such increase in Virginia in 17 years, along with our annual fuel case, riders for our Virginia City and Bear Garden generating plants, and an electric transmission rider. Earlier this week, we filed two additional riders to capture costs plus return on investment and a margin on O&M expenses associated with the demand side management and smart metering programs. We are moving to secure up to $200 million in funding from the Federal stimulus plan for these investments. I'll address each of these proceedings separately. First, on June 29, the Commission approved the electric transmission rider with a $68 million annual increase effective on September 1. The ruling required us to move about $10 million of the requested revenues to base rates from the transmission rider. Somewhat related, we will be posting our 2010 annual electric transmission rate with PJM on September 15. This FERC approved formula rate methodology is forward-looking and has a true-up provision to ensure the full recovery of cost. It is filed each year to keep revenues and earnings on pace with what we expect to be substantial additional investment in infrastructure as well as NERC related compliance capital and O&M expense. Second, in the fuel case, the company along with Virginia's consumer counsel asked the commission to reschedule the evidentiary hearing from July 16. The motion was granted and the hearing was rescheduled to September 1 to allow more time to resolve overlapping issues between the fuel case and the company's pending base rate case and rate adjustment clauses. Customers' bills were reduced by $3.64 per megawatt hour on July 1 in accordance with our request. Third, the State Corporation Commission ruled on two matters related to the company's base rate filing. On June 29 the commission ruled that the rate period for evaluating the cost of service will be the 12 months beginning September 1, 2009 through August 31, 2010. While this differed from the 27-month period contained in the company's original filing, it confirmed the commission will use a forward-looking test period to set base rates. On July 14, the Commission ruled that the company's capital structure as of December 31, 2008 is to be used in computing its overall cost of capital and revenue requirements. The company's original filing used the estimated cap structure as of December 31, 2010, reflecting the approximate midpoint of the rate period that was filed. Commission held that the 2007 law requires the use of an end of period capital structure for this initial base rate case only. The law grants the commission discretion to select the capital structure other than in the test year in all future biannual reviews. Last Friday the company filed an amended application that complies with both of these rulings while preserving our objections. The revenue increase requested in the amended filing is about $40 million lower than the original filing. In September, we will implement the base rate increase which we are requesting. Finally, hearings in West Virginia and Pennsylvania on the pending sales of Peoples and Hope are scheduled for August. We expect approvals in time for closing by year-end. As Mark mentioned earlier, we are updating our operating earnings outlook for 2010, lowering the range a little bit below 4% from $3.33 to $3.50 per share to a range of $3.20 to $3.40 per share. Our 2010 commitment to achieve a 55% dividend payout ratio remains unchanged. The new outlook incorporates a range of potential outcomes from the base rate case as well as the timing and strength of the economic recovery, electric load growth, and changes in commodity prices. Unfortunately, despite Virginia's relative strength, the recovery of the overall economy remains uncertain. When we provided our 2010 outlook in January, our expectation was that the overall economy would begin to see some improvements in the second half of this year. It is no longer clear that, that will be the case. It now appears that significant improvement will not occur until 2010. Taking all of these factors into account, we are confident in affirming our 2009 guidance and in our revised 2010 outlook. We will be in a position to provide further details on the impact of the rate case on our operating earnings outlook after we receive a final order. Consistent with our past practice, we plan to provide earnings guidance for 2010 and our outlook for 2011 at the beginning of next year. Let me finish by giving you my thoughts on one of the major issues facing our industry at the moment, the prospects for enacting a Federal legislation on climate change. As most of you know, the American Clean Energy and Security Act, otherwise known as Waxman-Markley, was passed by the House with a seven vote margin. Comparable legislation is currently being considered in the Senate, where its prospects are uncertain. One thing we do know is this legislation if enacted will have a profound impact on virtually every sector of our economy. For those of you who may not have read the 1,200 plus pages, the Bill passed by the House imposes energy efficiency standards on homes, commercial buildings, and appliances. It requires the purchase of emissions credits to drive your car, operate your business, or conduct any activity that involves the production or consumption of energy. It creates a host of new federal, state, and local authorities that will oversee the implementation of these regulations. The Waxman-Markley bill sets a cap on carbon emissions that is 3% below 2005 levels by 2012. This may sound like a relatively easy target to achieve. But CO2 emissions have been growing about 1% per year and are expected to be about 7% higher than 2005 levels by 2012. This makes the actual reduction from a business as usual case more like a 10% cut. There's not a lot this nation can do with its generating fleet between now and then except burn a lot more natural gas instead of coal. And as I am sure you are aware, the cap continues to decline, limiting emissions to 17% by 2020 and ultimately 80% below 2005 levels by 2050. As challenging as this may seem, the Bill that passed the House was a significant improvement over the Bill that was originally introduced in the Energy and Commerce Committee in terms of its potential impact on the electric power industry and its customers. Thanks to the leadership of Congressman Rick Boucher from Virginia, a number of changes were made to the Bill that mitigated some of the near term impact on electricity customers. The Edison Electric Institute, working with Mr. Boucher's office was able to craft a program where a significant percentage of the emissions allowances are allocated to local distribution companies to help their customers offset the higher electricity costs, should this Bill become law. There is also an allocation of allowances to merchant coal generators based on an estimate of the emissions costs that would not be recoverable through market prices. EEI and its members are working to make further improvements to the Bill. Looking ahead, I am frankly not sure if the Bill will make it through the Senate or not, especially this year. One possible alternative to a comprehensive climate change Bill is a standalone renewable and energy efficiency program. In the end, legislative initiatives to combat climate change will present significant challenges for the electric industry, our company, our customers, and our investors. Thank you and we are now ready for your questions.

(Operator instructions). Our first question comes from Hugh Wynne with Sanford Bernstein.

Good morning, Wayne. Hugh Wynne -- Sanford Bernstein: Good morning. Wonder if you could help me understand a little bit the premises for the 2010 revised guidance. I understand that we're cutting the earnings growth outlook from 4% to 6% to 0% to 3%, partly reflecting the expected outcome of the Dutco [ph] rate case, partly reflecting the level of gas prices. You're assuming $6.75 gas to $7.25 gas if I heard you correctly. And I also understand from your disclosures that you are about 60% hedged with respect to your power sales in New England. So I guess the first part of my question is why this relatively high expected gas price, let's say $7 on average, relative to the forward strip of $6? And then secondly, if you perhaps could elaborate a little bit on the expected impact of the Dutco rate case on the earnings outlook for next year?

Hugh, this is Mark. Let me take first part of that. In terms of the commodity price outlook, even in the second quarter of this year, gas prices approached the bottom of our range and bumped up on the $6.75. And we were able to take advantage of that both on coal and gas and a few Millstone hedges. We mentioned a number of times that we protected ourselves on the front end of 2010. And so based on the production information we see out there, we think it's still a reasonable assumption that gas could get into $6.75 to $7.25 range next year. Now granted, that may occur later in the year than what we originally thought and that's why we've been protecting ourselves on the front end. But we still believe that $6.75 to $7.25 is going to occur in 2010. And if it does so that our open positions at the end of next year will take advantage of that. As far as the rate case, we considered the rate case, we considered commodity prices, and we considered what our view was on financing cost next year and what our opportunities might be on expense costs. And in aggregate, we decided it was prudent at this time to adjust our range. Even though as I said in the text, it is certainly possible we could still reach the old range depending what the outcome is along all those lines. On the rate case, our range assumes a range of potential outcomes from the regulatory proceeding, which we don't know exactly what they will be, but we tried to reflect orders to-date in a range and what we think are reasonable outcomes going forward. We also mentioned 0% to 3% in terms of growth rate, that really is going to depend on where we come in this year, so I don't know how your math worked, but that growth rate again could be higher than that depending on what the final orders look like, what final commodity prices look like, and where we finish in our range for 2010. Hugh Wynne -- Sanford Bernstein: Thanks Mark. And then I guess just to finish it off, if we do see gas prices in the second half of next year that are closer to the forward curve, the sensitivity that we should be, which is about $1 below your estimate -- sensitivity we should be using is this one on page 10 that earnings might be then $0.11 lower in 2010 for every $1 that the gas price is below this $6.75 to $7.25 range?

Yes, I think if you look at that and as a single item which again we encourage everybody to look at it's a whole basket of opportunity that we have. But if you look at just the commodity price, I think it would be a fair assumption that if it's where it stands today, we would be at the lower end, and if it approaches the $6.75 to $7.25, we would be at the upper end. Hugh Wynne -- Sanford Bernstein: Great. Thank you very much.

Thank you. I think we're a little bit more hedged than you listed there, Hugh, but it's all in the hedging slide on some of the assets.

Thank you. Our next question comes from Paul Patterson with Glenrock Associates.

Good morning, Paul. Paul Patterson -- Glenrock Associates: Good morning. Just on the coal arbitrage that you mentioned being able to buy power and stockpile cheap coal, what's the financial impact of that in '09 and '010? I'm sorry if I missed that.

The financial impact in 2009 is immaterial. Paul, what we've been able to do is 24/7 prices at NEPOOL in the second quarter have been running in the $30 to $35 range, well below what our dispatch cost is for some of our marginal coal plants, namely at Salem. And so what we've done is we've been able to cover our hedges out of Salem and be able to bank coal to move it in 2010. This is a very low priced coal, and also to shift some deliveries from '09 to '010 as well. So the impact on '09 is immaterial, and on '010 what is allows us to do is to affect margins and dark spreads in the range of the $6.75 to $7.25 that we mentioned previously. Paul Patterson -- Glenrock Associates: Okay. So I guess I mean that goes back to Hugh's question. I'm trying to get a sense as to how much this coal arbitrage is helping out in 2010 on a dollar basis?

We're not going to give a dollar figure for our coal margins, and we never have before. What I would encourage you to look at again is that as we made these hedges our statement was they supported our outlook of $6.75 to $7.25, so that's consistent with what our range would be. And the open positions are really just what our exposure is left. Paul Patterson -- Glenrock Associates: Okay. Then just on rate case, I know you guys increased the ROE expectation there because of the higher leverage and I was just wondering what other factors might have -- I mean, I realize that you decreased it by $40 million, but it would seem to me that maybe there are other factors that could be influencing the revised filing to bring it in at $250 million. Could you give us a little bit more flavor? I would assume maybe $10 million of that is from the transmission. Are there any large components that are driving that?

Paul, you hit two of the three. The third one was the bad debt exposure gone up a little bit. I think its $6 million number in that range that we also added to update the case. It's those three components that put you to $250 million from what had been just about I think it was $287 million or number like that, just below $290 million. Paul Patterson -- Glenrock Associates: Right. The Bear Garden, some of the staff was suggesting that part of that go into base rates. That is not in this filing; correct?

That's correct. I think that position is untenable. But we will file shortly another document that says if it turns out that's correct, which like I said, we don't believe it is, then we'll transfer those funds, that recovery just to the base rate case. It won't make any difference overall in what happens, I mean, the staff testimony says it should be recovering base rates instead of the rider. We think it's more appropriately recovered in the rider. Paul Patterson -- Glenrock Associates: Just finally, the ARO benefit, what happened there?

ARO is the calculated benefit for the decommissioning trust in terms of liability expense, and periodically companies update that based on best estimates today, structure of decommissioning going forward, and I guess we're a little fortunate there, Paul, is that Unit One at Millstone is in the early stages of decommissioning. So we have much better actual cost on what it may cost going forward and probably are a little further along than some other companies in terms of plans on decommissioning. So we update our cost estimates and took a one-time reduction below the line to reflect what we think are the current expected costs to finish decommissioning for Unit One. Paul Patterson -- Glenrock Associates: Okay. Great. Thanks a lot, guys.

Thank you.

Thank you. Our next question comes from Andrew Wessel [ph] with Macquarie Capital. Andrew Wessel -- Macquarie Capital: Hi, good morning. Another question on the hedging activity. You mentioned that you expect downward pressure on natural gas in the near-term. We agree with that view. So I understand that the 2010 hedges are weighted toward the first half of the year. But if that's the case, why not add more hedges for 2009? If you expect a recovery around mid-year 2010, why add hedges on 2011 output now? How would you describe your view on gas in 2011?

Well, first, in 2009 we're almost completely hedged anyway for the rest of the year for our assets. We have a small open position at Millstone but we're comfortable, that's about as far as we want to go for hedging. In terms of 2011, we did put some hedges in recently for 2011, and it really goes back to we're not a big risk taker here. We're going to average in our hedges and not keep huge open positions going into any calendar year. We typically have done that over a three year period and we're going to continue with that philosophy. Now depending what our view is it might be a little slower or a little quicker depending on where we're going into a year. But we felt the positions we had in 2011, we wanted to start closing those and we thought the hedge price we had out there, which I think the average is about $72 on power as you look at what we put in place are fair on averaging basis. Our view that gas price is going to rise, it's just do nothing but increase that price in terms of the average basis as we go forward. But it's really the risk profile that we want. We want to balance that and average in over time. Andrew Wessel -- Macquarie Capital: Okay. Great. And then just one last question on the 2010 guidance. You mentioned operating expense control; can you elaborate or quantify some of the key moving parts there relative to your previous expectations?

We will get into the details of the operating expense and our other opportunities in January when we talk about more specifically on guidance. I guess what I would mention to you is we have $3.3 billion in operating expenses. And we're going to look closely what our opportunities might be to optimize those over the next couple years if there are any. Andrew Wessel -- Macquarie Capital: Terrific. Thank you very much.

Thank you. Our next question comes from Greg Gordon with Morgan Stanley. (Operator instructions). Go ahead, Mr. Gordon. Greg Gordon -- Morgan Stanley: Good morning, gentlemen.

Good morning, Greg. Greg Gordon -- Morgan Stanley: When I look at the guidance, the range of gas price assumptions now is the same as it was in your prior guidance, and you're saying that you've been able to optimize your fuel position for next year. So should I presume that the actual outlook as you see it embedded in the guidance, at least for the merchant business, is the same? Or is it that heat rates are lower in your outlook now or some other thing is driving lower expected margins in that business, vis-à-vis the lower guidance?

I think the assumption should be it's the same. Again, if the actual gas prices and correlating power prices turn out to be lower than what the $6.75 to $7.25 is, that would drive us more toward the bottom. And if it lands in that range, we should be middle to the top. Greg Gordon -- Morgan Stanley: Great. I understand that. So then the change in the guidance really relates more to changes in the assumed outcome in Virginia and financial market conditions and expense control, the other items you delineated on page 10 of your presentation; right?

Greg, I think it's all of the factors. As we said in our script, certainly, it is certainly possible that we could earn in that original forecast that we gave in January. The economy though seems to be bouncing along a bottom for an extended period, although I believe you all study things all across the country much more closely than we do. Our service territory here in Virginia compared to many is I guess you can't call anything robust, but in a relative manner it is. And that will continue. But as we were looking out we want to try to give you our best thinking when we have it about what's going to happen in 2010. We've hedged some more Millstone. It's now at 60%. The coal assets in New England are now at 65% for 2010. Mark mentioned to you that have over $3 billion in non-fuel O&M expense at the company. We made some O&M cuts as we entered this year against what our budget was. We have other opportunities if necessary. Our interest expense if we stay in a recession for a longer period of time is going to be lower than is in the forecast. We're hopeful is that people will look at all of the variables that we have, things we can control in a positive way, and things we can't control. It's when you take all those factors into account that we think it was prudent at this stage to give a forecast for next year that reflects all of those factors. Greg Gordon -- Morgan Stanley: Great. Okay. Thank you.

Thank you, Greg.

Thank you. Our next question comes from Nathan Judge with Atlantic Equities. Nathan Judge -- Atlantic Equities: Good morning. Wanted to ask a bit on demand and the impact of weather. I know you've reduced or taken some type of adjustment for your outlook on July weather. Unfortunately, the sun hasn't shown much. Can you just give us an idea of what that weather were to continue into August, what kind of impact that would have and what your now forecast looks like for demand for the rest of the year?

The weather forecast for August are normal and the same for September so we don't expect there to be any other serious deterioration, you make a lot of money around here if you get a hot week. So I can't tell you. I unfortunately can't answer that question, because it looks like weather will be normal for the balance of the quarter. But there's lots of things we can do, and we're very confident in our 2009 forecast. The sales growth at both our residential and commercial customers is flat or positive for the year-to-date and we expect that to continue. Our new connects is on our budget. July has been a good month for that. The industrial customers continue to lag. We think as the economy goes along, that will start increasing and as the new connects get into our system, we believe that we will come out of the end of the year as we've been saying since the beginning of the year; we'll exit 2009 with some positive sales growth. We do have revenue growth even in that down sales situation because of the way our regulatory system here works and our rider revenues that we're getting from the Southwest Virginia case are in rates already. The transmission increases will be in rates and our filing will be in rates. That latter part subject to refund. The other two are not subject to refund. So as we exit the year, we think we're not going to be wild growing at a really rapid pace, but we expect to have positive sales growth by the time we get to the end of the year. And I think we can handle the weather with what we've had happened so far. Nathan Judge -- Atlantic Equities: Just a clarification. Can you quantify how much you reduced your expectation this year for or you made adjustments for this year related to the June or July weather?

July weather.

: Nathan Judge -- Atlantic Equities: Very good. Do you have a sensitivity to gas prices related to 2011?

We do not. We're going to talk more about 2011 on our January call as we typically would. Nathan Judge -- Atlantic Equities: Very good. And then just on E&P, I know you accelerated the number of wells you've drilled, and when you look at lifting cost, lifting costs have come down. But they seem to have fallen less than what a 60% decline in rig rates across the country would suggest that they maybe perhaps cost of rig rates would have fallen. Could you just give us some bit of idea of what's going on in there and your opportunities and challenges at this point?

I'm going to ask Gary Sypolt to answer that question.

Actually, we have seen costs drop on our conventional drilling. Most of it's been tied to steel cost that hasn't been a significant drop. But when you look at it, you see that we did drop our drilling costs, you said insignificantly, we actually were fairly proud of that drop. But the drilling costs themselves in Appalachia for rigs haven't dropped significantly yet because we have seen a great decline in Appalachia, not similar to the 60% you've seen across Texas and other parts of the nation. Nathan Judge -- Atlantic Equities: Okay. And you may have said this. I apologize if I've missed it. But you've made some adjustment to your base rates and fuel costs and things of this nature. Now could you just give us an idea of what the impact of the customers, net-net of all these adjustments would have been?

Well, if you looked at all of it, I guess it was originally about under a 7% increase and since there's a little bit coming out of the revenue requirement, it will be closer to 6% probably increase overall. (inaudible) when you take all of it into account. Nathan Judge -- Atlantic Equities: Thank you.

Thank you. Our last question comes from Dan Eggers with Credit Suisse. Dan Eggers -- Credit Suisse: Good morning. I know we spent a lot of time talking about 2010 and the new onus to hunker down in line. But if you look at the demand outlook from here, are you seeing any need to re-evaluate some of the capital programs either in absolute terms or in potentially pushing out some of the timing if demand is not as good as you originally anticipated?

No. The PJM came out just a couple of months ago and reaffirmed that Virginia still needs a lot of new power generation before we get just out over the next 10 years, over 2019. We've done 785 megawatts of upgrades already. Bear Garden is approved and under construction. The Southwest Virginia case is approved and under construction. We're looking at further expansions of Warren County for combined cycle. Also our Possum Point facility we're looking at. And we've got our new wind farms also that we're looking at in Southwest Virginia and some biomass projects. North Anna is we're just going to have to see how these bids come out and we have to have the power in this state. It's a mandate from our legislature and I think the commission's view of that is best enunciated not by us, but by them in the Bear Garden order if you have a chance to review that, what they think the power needs are and the way they want us to go about meeting those. If North Anna turns out that we can't come up with a proposal that we're satisfied with and the commission's satisfied with on the risk sharing and the cost, then we will have to supply the power with other methods, whether it's more gas-fired plants or other means. It won't be from purchasing power out of the markets, because that is contrary to the legislative mandate and the governor's energy policy plan that was adopted last year. On the Dominion Energy front, we are looking hard at the Appalachian Gateway project because while there is a plenty of gas in Appalachia, there is not plenty of infrastructure in Appalachia to get the gas to market. So that we will be looking at. We did an open season. It was fully subscribed at rates that we like. We have another project we're looking at in Appalachia. East Ohio, we will be doing the bare steel pipe replacements with the Cove Point Pier expansion. That project is fully subscribed to our shippers, so those costs are covered. So our transmission upgrades are going forward. They're approved, under construction. We will be filing for substantial additional funding for our transmission infrastructure, electric infrastructure, with some of the new NERC requirements, and other upgrades that are necessary. So we will trim our capital budgets as we go along, as we always do. But the demand situation in Virginia is relative to other places, still quite good. Dan Eggers -- Credit Suisse: So separate from some economic adjustment to 2010, no change to long-term growth rates then?

That's correct. Dan Eggers -- Credit Suisse: Okay. Thank you.

Thank you.

Thank you. Ladies and gentlemen, we have reached the end of our allotted time. Mr. McGettrick, do you have any closing remarks?

Thank you. I would like to thank everybody for joining us this morning. Just reminder that our Forms 10-Q are expected to be filed with the SEC later today and our third quarter earnings release is scheduled for October 30th. Have a good day. Thank you.

Thank you. This does conclude this morning's teleconference. You may disconnect your lines and enjoy your day.