Dominion Power 2003 Annual Report Download - page 36

34.Dominion 2003
Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Nonregulated gas sales revenue decreased 28% to
$778 million, primarily reflecting:
• A $261 million decrease in sales by Dominion’s field services
and retail energy marketing operations, reflecting to a large
extent declining prices and
• A $51 million decrease in Clearinghouse gas revenue, net of
applicable trading purchases, due to unfavorable price changes
on unsettled contracts and lower overall margins. Those losses
were partially offset by contributions from higher trading volumes
in gas and oil markets. The decrease included a $70 million rev-
enue decrease associated with the economic hedges.
Gas and oil production revenue increased 26% to $1.3 bil-
lion, reflecting higher overall production as a result of the inclu-
sion of a full year of operations after the Louis Dreyfus acquisition
and Dominion’s ongoing drilling programs. Average realized gas
and oil prices, including the effects of hedging, decreased for the
comparative years.
Operating Expenses and Other Items
Purchased gas expense decreased 36% to $1.2 billion, primarily
reflecting:
• A $196 million decrease associated with field services and
gas transmission operations, primarily reflecting lower prices and
• A $489 million decrease associated with regulated gas oper-
ations discussed above in Regulated gas sales revenue.
Liquids, pipeline capacity and other purchases expense
decreased 28% to $159 million, primarily reflecting comparably
lower levels of rate recoveries of certain costs of transmission
operations in the current year period. The difference between
actual expenses and amounts recovered in the period are
deferred pending future rate adjustments.
Other operations and maintenance expense decreased
25% to $2.2 billion, primarily reflecting the following expenses
incurred in 2001 that did not recur in 2002:
• A $281 million charge for impairments of certain financial
assets held by DCI;
• $151 million charge for credit exposure associated with the
bankruptcy of Enron;
• A $220 million charge related to the termination of certain
long-term power purchase contracts and
• A $40 million loss on the sale of assets by DCI.
Depreciation expense increased 1% to $1.3 billion, primarily
reflecting the combined effects of:
• A $95 million decrease resulting from discontinued amortiza-
tion of goodwill effective January 1, 2002;
• A $58 million decrease related to the extension of estimated
useful lives of most fossil fuel stations and electric transmission
and distribution properties in 2002 and nuclear properties
in 2001;
• $138 million of additional depreciation, depletion and
amortization expense recognized in connection with a full
year of operations after the Louis Dreyfus acquisition and
• A $28 million increase associated with other new
plant additions.
Other taxes increased 9% to $429 million, primarily due to
higher severance taxes associated with a full year of Louis Drey-
fus operations. In addition, Dominion incurred higher property
taxes on new asset additions, partially offset by lower gross
receipts taxes, primarily reflecting lower regulated gas
sales revenue.
Other income decreased 18% to $103 million, primarily
reflecting $27 million of equity losses from DFV.
Income taxes Dominion’s effective income tax rate decreased,
reflecting the net $33 million effect of including certain sub-
sidiaries in Dominion’s consolidated state income tax returns. In
addition, the effective tax rate decreased for foreign earnings, the
discontinuance of goodwill amortization for book purposes and
other factors.
Outlook
— Dominion
Dominion believes its operating businesses will provide growth
in net income on a per share basis, including the impact of
higher expected average shares outstanding, in 2004 and 2005.
Growth factors for 2004 include:
• Potential increase in regulated electric sales, as compared to
2003, assuming Dominion’s utility service territories experience a
return to normal weather in 2004;
• Continued growth in utility customers;
• Reduced electric capacity expenses, resulting from terminated
contracts;
• Lower interest expense as a result of refinanced debt;
• Higher expected levels of gas and oil production as a result of
Devils Tower and Front Runner becoming operational;
• Improved contributions from Millstone’s operations, resulting
from expected higher capacity factors and favorable sales prices;
• Higher contribution from Cove Point operations;
• Expected Six Sigma benefits and
• Specific costs and reductions to earnings in 2003 that are not
expected to recur in 2004, including:
• Lost revenue due to Hurricane Isabel;
• The Virginia fuel rate case settlement and
• Costs associated with refinancing callable debt.
For 2004, the growth factors will be partially offset by:
• Decreased pension credits and increased other postretirement
benefit costs;
• Higher expected operating expenses for gas and oil produc-
tion and
• Normalization of Clearinghouse contribution.
Growth factors for 2005 include:
• Gas and oil production growth, reflecting a full year of Devils
Tower and Front Runner operations;
• A full year of operations of the Kewaunee power plant,
expected to be acquired in the second half of 2004;
• Continued growth in utility customers;
• Expanded operations of Cove Point and