Dominion Power 2003 Annual Report Download - page 28

26.Dominion 2003
Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Dominion Generation includes the generation operations of
Dominion’s electric utility and merchant fleet. The fuel mix used
by these operations is diversified and includes coal, nuclear, gas,
oil, hydro and purchased power. Dominion’s strategy for its elec-
tric generation operations focuses on serving customers in the
MAIN to Maine region. Its generation facilities are located in Vir-
ginia, West Virginia, North Carolina, Connecticut, Illinois, Indi-
ana, Pennsylvania and Ohio. In addition, Dominion expects to
complete the acquisition of the Kewaunee power plant located in
northeastern Wisconsin in the second half of 2004.
Utility generation operations represent Dominion Generation’s
primary source of revenue and cash flow. These operations are
sensitive to external factors, primarily weather. Currently, revenue
from utility operations largely reflects the capped rates charged
to customers in Virginia, the majority of its utility customer base.
Under Virginia’s current deregulation legislation, electric rates are
capped through mid-2007. As rates are capped, changes in
Dominion Generation’s operating costs, relative to costs recov-
ered in the capped rates, will impact Dominion’s earnings.
Dominion Generation has reduced costs by terminating certain
long-term power purchase agreements and, based on engineer-
ing studies, extended the estimated useful lives of generation
assets, reducing the annual depreciation expense for those
assets. Currently, legislators in Virginia are evaluating the future
of electric deregulation in Virginia as well as the possibility of
extending the capped rates period.
Prices received for electricity generated by its merchant fleet
are market-based, subjecting Dominion Generation to risks associ-
ated with recovering capital expenditures and absorbing variabil-
ity in fuel costs. Generally, Dominion Generation manages these
risks by entering into fixed-price sales and purchase contracts.
Variability in expenses for Dominion Generation relates pri-
marily to the cost of labor and benefits, fuel consumed and the
timing, duration and costs of scheduled outages. Dominion is cur-
rently permitted to seek rate-recovery for fuel costs associated
with utility operations.
Dominion Energy includes the following operations:
• A regulated interstate gas transmission pipeline and storage
system, serving Dominion’s gas distribution businesses and
other customers in the Midwest, the Mid-Atlantic states and the
Northeast;
• A regulated electric transmission system principally located in
Virginia and northeastern North Carolina;
• Field services operations, representing aggregation of gas
supply and related wholesale activities related to Appalachian
and Canadian areas;
• A liquefied natural gas unloading and storage facility in
Maryland;
• Certain gas production operations located in the Appalachian
basin and
• Dominion Energy Clearinghouse (Clearinghouse), which is
responsible for energy trading, marketing, hedging and arbitrage
activities.
Dominion Energy’s revenue and cash flows are derived from
both regulated and non-regulated operations.
Revenue and cash flow provided by regulated electric and
gas transmission operations and the liquefied natural gas facility
are based primarily on rates established by the Federal Energy
Regulatory Commission (FERC). Variability in revenue and
cash flow provided by these businesses results primarily from
changes in rates. Variability in expenses relates largely to
operating and maintenance expenditures, including decisions
regarding use of resources for operations and maintenance
or capital-related activities.
Revenue and cash flow for Dominion Energy’s nonregulated
businesses are subject to variability associated with changes
in commodity prices. Dominion Energy’s nonregulated businesses
use physical and financial arrangements to hedge this price
risk. Certain hedging and trading activities may require cash
deposits to satisfy margin requirements. In addition, reported
earnings for this segment reflect changes in the fair value of
certain derivatives; these values may change significantly from
period to period. Variability in expenses for these nonregulated
businesses relates largely to labor and benefits and the costs
of purchased commodities for resale and payments under
financially-settled contracts.
Dominion Delivery includes Dominion’s electric and gas
distribution systems and customer service operations as well as
retail energy marketing activities. Electric distribution operations
serve customers in Virginia and northeastern North Carolina.
Gas distribution operations serve residential, commercial and
industrial gas sales and transportation customers in Ohio, Penn-
sylvania and West Virginia. Retail energy marketing activities
include the marketing of gas, electricity and related products
and services to residential and small commercial customers in
the Northeast and Midwest.
Revenue and cash flow provided by electric and gas distribu-
tion operations are based primarily on rates established by state
regulatory authorities. Variability in Dominion Delivery’s revenue
and cash flow relates largely to changes in volumes, which are
primarily weather sensitive. For local gas distribution operations,
revenue may vary based upon changes in levels of rate recovery
for the costs of gas sold to customers. Such costs and recoveries
generally offset and do not materially impact net income. Rev-
enue from retail energy marketing operations may vary in con-
nection with changes in weather and commodity prices as well
as the acquisition and potential loss of customers.
Variability in expenses results from changes in the cost of pur-
chased gas, routine maintenance and repairs (including labor
and benefits as well as decisions regarding the use of resources
for operations and maintenance or capital-related activities), and
unplanned damage to property, such as the recent storm-related