Greg Snyder -- Director, IR Mark McGettrick -- EVP and CFO Tom Farrell -- Chairman, President and CEO David Christian -- CEO, Dominion Generation Ashwini Sawhney -- VP and Controller

Paul Fremont -- Jefferies Hugh Wynne -- Sanford Bernstein

Good morning and welcome to Dominion fourth quarter earnings conference call. On the call today, we have Tom Farrell, CEO and other members of the senior management. Please be aware that your lines are in a listen-only mode. At the conclusion of the presentation we will open the floor for questions. At that time instructions will be given as per the procedure to follow if you would like to ask a question. I would now like to turn the conference over to Greg Snyder, Director of Investor Relations for Safe Harbor statement.

Good morning. And welcome to Dominion’s Fourth Quarter Earnings Conference Call. During this call we will refer to certain schedules included in this morning’s earnings release and pages from our fourth 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. If you have not done so I encourage you to visit our Web site, register for e-mail alerts and view our fourth quarter 2009 earnings documents. Our Web site address is www.dom.com/investors. In addition to the earnings release kit we also have included 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 our 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 first quarter and full year 2010 operating earnings guidance 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 our 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 other members of our management team. Tom will update you on regulatory proceedings and other operational and strategic issues following my overview of 2009 financial results and 2010 operating earnings guidance. We will then take your questions. Tom Farrell will identify the key elements of a proposed settlement agreement which we and others submitted to the State Corporation Commission to resolve Virginia Power's base rate case which is now underway. So let me begin by pointing out that the 2009 operating and GAAP earnings reflect reserves associated with the impacts outlined in that agreement. With that back drop let me discuss consolidated 2009 results. 2009 was a good year for Dominion. Operating earnings were $3.27 per share falling in the upper half of our annual guidance range and a 3.5% increase over 2008. These results were driven by good performance from our business units as well as lower financing costs and income taxes. Our operating earnings include a fourth quarter reserve of $50 million after tax or $0.08 per share related to the proposed rate settlement. I will cover these results in more detail in a moment. Also, late last year we announced a 4.6% increase in our dividend, from annual rate of $1.75 per share to $1.83 per share. The new rate is consistent with our targeted payout ratio of 55%. We produced operating earnings in the fourth quarter of 2009 of $0.63 per share. These operating earnings reflect the $0.08 per share reserve to offset the higher rates implemented September 1st. We were able to offset the impact with a proposed rate settlement as well as a year-end unplanned outage at Millstone Unit 3 and still deliver operating earnings in the upper half of our guidance range of $0.55 to $0.65 per share. Taxes were somewhat lower than our guidance. We anticipate a 36% effective tax rate as well as an estimated 30 million further reduction to our income taxes related to a manufacturing deduction. GAAP earnings were $0.28 per share for the fourth quarter and $2.46 per share for the full year of 2009. The largest differences between GAAP and operating earnings were the fourth quarter impact of the proposed settlement agreement and the Virginia rate proceedings and the first quarter impairment charge from a ceiling test on our oil and gas properties. A summary of other differences along with the reconciliation of GAAP to operating earnings can be found on schedules II and III of the earnings release kit. Now, moving to operating results for our business units. Full-year 2009 EBIT for Dominion Virginia Power and Dominion generation was below our guidance range issued last January. Largely due to mild weather and the impact of the proposed settlement agreement, which calls for no increase in base rates. Dominion Virginia Power also experienced higher storm restoration costs and Dominion generation experienced lower realized power prices. Weather normalized retail kilowatt hour sales for 2009 were down 1.1% from 2008, but for the fourth quarter were actually up 0.7%. The detailed sales figures are shown on Page #38 of the earnings release kit. Dominion Energy finished in the upper half of our 2009 EBIT guidance range. Higher than expected transportation as storage revenues as well as lower fuel costs were key contributors to the strong performance. Operating results for Dominion Energy also include Hope Gas which had previously been excluded from operating earnings. Its inclusion at less than a $0.01 per share impact. At a consolidated level interest expenses and our effective tax rate were lower than expected. Interest expenses were $118 million below the bottom of our guidance range due to strong internal cash flow, lower interest rates and the benefits of pre-issuance hedges. While our full year 2009 guidance issued last January assumed a 38% effective tax rate, our actual effective tax rate for the year was about 35%, slightly below the 36% for 2008. We believe a 36% to 37% tax rate is a reasonable going forward assumption for our consolidated results. Moving to cash flow and treasury activities. I'm pleased to report that we expect to close the sale of Peoples Gas shortly. As you know we canceled the sale of Hope Gas after the ruling by the West Virginia Public Service Commission. However, we still expect to receive proceeds of $780 million before adjustments for working capital, which is approximately 80% of the combined transaction. The after-tax proceeds from the sale of Peoples Gas will be used to pay down debt. The reduced proceeds will have no impact on our incremental needs for new common equity. Cash flow from operations was 3.8 billion in 2009 compared to 2.7 billion in 2008. Liquidity was very strong at 3.3 billion at year-end. For statements of cash flow and liquidity please see pages #14 and #39 of the earnings release kit. The Company’s equity needs in 2010 are relatively modest. As we have stated in the past the equity need for 2010 is approximately $400 million. Early indications from potential purchasers of our Marcellus acreage show a very strong interest in our properties. Since we expect to begin to monetize the Marcellus acreage this year we expect to reach sufficient after-tax proceeds to offset the need for all 400 million and plan to use market purchases to satisfy our dividend reinvestment in other automatic issuance plans. This improves our ability to achieve our 2010 operating earnings guidance as our original outlook did not include the Marcellus sale and assume the 400 million would be met with new shares. Our debt needs for the year to cover both maturities and new capital investment are fairly typical. Current plans call for 1.1 billion at Dominion and 850 million at Virginia Power. Recall that all of this planned issuance was hedged early last year when treasury rates were significantly lower than today. Based on our current value of the hedges we expect to achieve an effective rate which is approximately 80 basis points lower than current market rates. We expect our interest expense to be lower than previously thought in 2010, which also improves our ability to achieve our 2010 guidance. We are also planning to replace our credit facility some time in the second quarter or third quarter of this year. We have a 1.7 billion facility terminating in August, a 200 million bilateral facility terminating in December and our 2.9 billion core facility terminating in February of next year. For several reasons we will be able to operate with less liquidity than we have maintained in recent years. First, these facilities back up commercial paper and we intend to manage that program at a materially lower level than in the past. Second, over the last year, we have made significant progress in hedging our gas and electricity output and transactions that do not require margin support and therefore we need less liquidity to support our commodity hedges. Finally, while improving dramatically over the last two quarters we all know the bank capacity for traditional credit facilities has decreased and pricing has increased. We believe we can operate comfortably with credit facilities totaling $3 billion to $3.5 billion and believe our bank groups will be supportive. We have discussed our plans with the rating agencies and they are comfortable with our approach. Now to first quarter and full-year 2010 guidance. Dominion expects first quarter 2010 operating earnings in the range of $0.90 to $1 per share compared to operating earnings of $0.98 per share in the first quarter of 2009. Positive factors for the first quarter of 2010 compared to the prior year include higher, wider revenues and the impact of a full quarter’s benefit from the Cove Point expansion. Factors offsetting these positives include lower merchant generation margins, normal weather and the impact of an unplanned outage at Millstone Unit 3 in January. We are also affirming our 2010 operating earnings guidance of $3.20 to $3.40 per share. The major drivers include the proposed settlement agreement for the Virginia rate case, our current hedge positions, the lower financing costs and operating expenses. We will not provide additional detail supporting our 2010 guidance or the outlook for later years until we have received a final decision in the base rate proceeding in Virginia. That may not happen until March or April of this year. Assuming we receive a decision by that time, we will be in a position to provide more information at our analyst meeting which we intend to be scheduled for the morning of May 7, in New York. One of the drivers of our 2010 guidance that we can update is our sensitivity to changes in commodity prices. We have added to our 2010 hedge positions for Millstone and our New England coal units increasing the coverage of expected output to 90% and 85% respectively. We have now essentially completed our hedging for 2010 and have only minimal exposure to changes in commodity prices. Our sensitivity to $1 move from natural gas prices in 2010 is now less than $0.05 per share. We also raised our 2011 hedge position for Millstone to 31%. The update of our hedge positions can be found on Pages #32 to #34 of our earnings release kit. We intend to provide some supplemental disclosure of our operating results beginning with the release of first quarter 2010 earnings. The 10-K format is shown in the slide presentation. In addition to our disclosure by business unit we will show quarterly EBIT for the legal entity of Virginia Power, which includes generation, transmission and distribution, operations. We’ll also show quarterly EBIT for our regulated gas businesses, merchant generation, unregulated natural gas and Dominion Retail. We intend to discuss this in detail on our next earnings call and we hope this provide some of the information that many of you have requested. I will now turn the call over to Tom Farrell.

Good morning, everyone, and thank you fore joining us. Our operational performance met or exceeded expectations at each business unit in 2009. Our nuclear fleet achieved a 93.1% capacity factor for the year, the highest combined level since 2005, the year that the last of our seven units was acquired. We also had several successful refueling outages in 2009. A station record of 27 days was set at Quani [ph] and a Dominion nuclear fleet record of just under 23 days was achieved at Surry Unit No. 1. Our fossil and hydro generation fleet operated well. With an overall equivalent forced outage rate of 3.52% and a record best ever of 3.31% for the Virginia Power fleet. The capacity factor at Fairless Power Station was 64.3% the highest in its six-year history. We continued to implement our company wide infrastructure growth program. Dominion Generation added 417 net megawatts of new capacity to its fleet last year. In our regulated operations the completion of Ladysmith 5 added 151 megawatts and numerous upgrades and other changes added another 116. In our merchant generation business the Fowler Ridge base one wind project added 150 megawatts of renewable capacity. At Dominion Virginia Power our efforts and investment to improve system reliability continued to produce positive results. Average minutes out excluding major storms for 2009 declined nearly 9% from the prior year. Dominion Virginia Power also added over 31,000 new connects. Although this was below the levels of the past few years, it was still a strong showing in a down economy. We exited 2009 with positive trends in both sales and customer growth. Operations at Dominion Energy’s pipeline and storage business were highlighted by the completion of the Cove Point Expansion Project and the USA Storage Project. We also began offering interim service at Dominion Hub I in November. Our smaller non-regulated businesses also performed well during the year. Dominion E&P drilled 307 wells in 2009 without a single dry hole including 22 vertical Marcellus wells. Dominion Retail added 184,000 net new customer accounts during 2009. It also had great success this quarter in the recently opened market in PPLs service area, acquiring an additional 185,000 new customers this month, which is almost 75% of all customers who have switched suppliers. As I have discussed in previous conference calls the Virginia economy has held up relatively well during the economic downturn. The national unemployment rate remained above 10%. But the rate in Virginia has remained well below the national levels at less than 7%. The unemployment rate in our service area is also below the average for the state. We are looking for a modestly improving economy in 2010. The strength of our service area supports our infrastructure growth program at Virginia Power. PJM confirmed our state economic strength in its recently published annual forecast of demand growth. The Dominion zone advanced from the second highest to the highest growth rate among all 19 zones within PJM, covering 13 states and the District of Columbia. PJM projected the ten-year summer peak load to grow at a 2.5 annual rate, up from 2.2% last year. That projection supports the need for over 5600 megawatts of additional generating capacity by 2020. PJM’s projection in 2007 identified only a need of 4,000 megawatts by 2017. We continue to progress on a regulated growth projects. At year-end the Virginia City Hybrid Energy Center was 55% complete and Bear Garden Power Station was 48% complete. Both projects remain on schedule and on budget. Our two major transmission projects, the Meadowbrook-to-Loudoun and Carson-Suffolk line are also on schedule for 2011 in service date. All of these projects totaling over $3 billion in new investment qualify for enhanced rates of return. Our infrastructure growth program extends to our pipeline and storage business as well. In our market area the arrival of the Rockies Express and the potential development of the Marcellus Shale formation create a significant number of opportunities for new infrastructure investment projects. One of these is the Appalachian Gateway; the $635 million pipeline project will ensure market access for the participating Appalachian producers by firming up their transportation rights. We prefiled for FERC approval last fall and hope to obtain our certificate early next year. Also, the gathering enhancement project estimated at an additional $250 million which does not require permits will add critically necessary additional gathering and processing facilities. We expect construction to begin next year and have all of these facilities in service by the fall of 2012. Other projects we are evaluating include the 300,000 Dth/d from Marcellus Northeast pipeline where we conducted a favorable (inaudible) season in August. And the keystone connector, a potential joint venture with Transco which we transport Rockies and Marcellus Shale Gas across Pennsylvania to the East Coast markets. We discussed our plans to monetize our 450,000 plus acres in the Marcellus formation over the next two years on our last call. While we have nothing to announce today, as Mark said, the level of interest has been strong. We intend to use the net proceeds for many sale of Marcellus acreage to offset the need to issue new common stock. Now I want to update you on the progress in our regulatory proceedings. Hearings are underway in the proceeding to set base rates for Virginia Power under the state’s 2007 reregulation statute. On November 5th the company along with the Attorney General’s Office and Consumer Council and several large commercial and industrial customers submitted a proposed settlement agreement. The agreement provide for no change in base rates from their pre-September 2009 levels and a very significant credit to customers which will offset rate increases for 2010 from our growth projects. The return on equity would be set at 11.9% for base rates and 12.3% including the statutory generation premium of 100 basis points for the rate riders for the Virginia City and Bear Garden Generating Plants The Commission has agreed to consider the stipulation while it hears the rest of the evidence in the rate case. Assuming a full hearing of the evidence and a briefing process we would not expect the final decision from the Commission before March or April. Once we receive a final order, we will be in a position to provide further details on our guidance for operating earnings for 2010 and later years. As Mark mentioned we have tentatively scheduled an analyst meeting for the morning of May 7th in New York. We have also filed this quarter for an increase in base rates for our North Carolina service territory. We expect the decision in that proceeding before the end of the year. Overall, 2009 was a very good year for Dominion. We delivered higher operating earnings, increased our dividend, made substantial progress in our infrastructure growth program and added significantly to our renewable generation portfolio. We are nearly finished with the base rate case in Virginia. We are optimistic about 2010 and look forward to discussing with you in more detail in the near future. Thank you and we are now ready for your questions.

(Operator instructions). Our first question comes from Paul Fremont with Jefferies. Paul Fremont -- Jefferies: Good morning. One quick point of clarification on the guidance. Does the 2010 guidance also incorporate the staff recommendation in the rate proceeding or would that fall outside?

We’re not going to make any further comments about the rate case at this time, Paul. It will work its way through and we will evaluate it at the end. Paul Fremont -- Jefferies: My other question has to do with the improvement in tax rate for the quarter at the generation subsidiary. What drove the lower tax rate in the fourth quarter in generation?

Paul, in general, on taxes what we guided everybody to as we went into the fourth quarter is we thought we’d see a 36% tax rate and we also noted to everybody that on the manufacturing side, we also anticipate a $30 million incremental reduction in taxes in the quarter. In addition to that, our taxes did come in better. That would have given us about a 29% tax rate. We came in about 22%. It’s really driven by two main items. One is that the manufacturing deduction that we anticipate at $30 million came in at about $42 million and that there were some state allocation changes that benefited us to the tune of about $23 million. So it drove a lower fourth quarter number, but if you look at it year-over-year our tax rate consolidates about 35% this year and about 36% last year and we think 36% to 37% on a going forward basis is probably accurate. Paul Fremont -- Jefferies: Is there anything that sort of spills over that causes you to think the tax rate is lower than your original guidance for next year of 38%?

Again, I think what we said today is you should assume for 2010 a tax rate in the range of 36% to 37%. Paul Fremont -- Jefferies: Thanks.

Thank you, Paul.

Our next question comes from Hugh Wynne with Sanford Bernstein. Hugh Wynne -- Sanford Bernstein: Good morning. What gives rise to the $0.09 negative variance associated with outages? Can you give us some color on that?

This is David Christian. We had a higher than scheduled outage season for the fourth quarter and we got it at early on. In addition to that we had the unplanned outage at Millstone that was referred to earlier, 17 days, 9 hours and 24 minutes carried on over a little bit into 2010. Hugh Wynne -- Sanford Bernstein: That’s resolved?

That’s resolved. Yes.

One other item to add onto Dave’s comment is as we saw our way toward the end of 2009 we elected to move some outage work from the spring of 2010 into the fall of 2009 in generation. So that increased that O&M estimate by about $25 million than what we previously anticipated. Hugh Wynne -- Sanford Bernstein: Okay. Second question, the reserve for the proposed settlement in Virginia in your slide is that 428 million on a pretax basis. In the cash flow statement I noticed a reserve for proposed rate settlement of 510 million. What’s the difference?

I'll let, Ashwini, our Chief Accounting Officer answer that question.

Hi, Hugh. The difference between the 428 and the 510 that’s reflected on the statement of cash flows is the reserve related to the interim rates that went into affect September 1st and that was about $82 million pretax. Hugh Wynne -- Sanford Bernstein: Okay. And then last question, could you remind me, this is money you’re going to have to give back to rate payers in 2010. Why are we excluding this from operating earnings?

Hugh, the way we address is that any impact to 2009 calendar year we reflect it as an impact to operating earnings. The other potential reserves that were set up were outside of the calendar year for 2009. Earnings in 2008, some potential fuel or FTR expenses and we deem those consistent with past practices as non-operating. Hugh Wynne -- Sanford Bernstein: All right. Thanks very much.

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

Yes, thank you. We’d like to thank everybody for joining us this morning. Just a reminder, there are Forms 10-K are expected to be filed with the SEC at the end of February and our first quarter 2010 earnings release is scheduled tentatively for April 29. Thank you again.