Dominion Power 2003 Annual Report Download - page 39

37.Dominion 2003
In addition, the Clearinghouse held a portfolio of financial
derivative instruments to manage Dominion’s price risk associated
with a portion of its anticipated sales of 2003 natural gas pro-
duction that had not been considered in the hedging activities of
the Dominion Exploration & Production segment (economic
hedges). For the year ended December 31, 2003, Dominion
Energy recognized a net loss of $10 million on the economic
hedges. As anticipated, Dominion Exploration & Production sold
sufficient volumes of natural gas in 2003 at market prices, which,
when combined with the settlement of the economic hedges,
resulted in a range of prices for those sales contemplated by the
risk management strategy.
A summary of the changes in the unrealized gains and losses
recognized for Dominion’s energy-related derivative instruments
held for trading purposes, including the economic hedges, during
2003 follows:
Amount
(millions)
Net unrealized gain at December 31, 2002 $ 170
Reclassification of contracts — adoption of EITF 02-3:
Non-derivative energy contracts (110)
Derivative energy contracts, not held for trading purposes (81)
(21)
Contracts realized or otherwise settled during the period 41
Net unrealized gain at inception of contracts initiated
during the period
—
Changes in valuation techniques —
Other changes in fair value 13
Net unrealized gain at December 31, 2003 $33
The balance of net unrealized gains and losses recognized
for Dominion’s energy-related derivative instruments held for
trading purposes, including the economic hedges at December
31, 2003, is summarized in the following table based on the
approach used to determine fair value and contract settlement
or delivery dates:
Maturity Based on Contract
Settlement or Delivery Date(s)
Less In Excess
Source of than 1-2 2-3 3-5 of
Fair Value 1 year years years years 5 years Total
(millions)
Actively quoted(1) $(14) $24 $ 4 —— $14
Other external
sources(2)
— 10 6 $3 — 19
Models and
other valuation
methods(3) ———— ——
Total $(14) $34 $10 $3 — $33
(1) Exchange-traded and over-the-counter contracts.
(2)Values based on prices from over-the-counter broker activity and industry
services and, where applicable, conventional option pricing models.
(3)Values based on Dominion’s estimate of future commodity prices when
information from external sources is not available and use of internally-
developed models, reflecting option pricing theory, discounted cash flow
concepts, etc.
Dominion Delivery
Dominion Delivery includes Dominion’s electric and gas distribu-
tion and customer service business, as well as retail energy mar-
keting operations.
2003 2002 2001
(millions, except EPS)
Net income contribution $ 453 $ 422 $ 311
EPS contribution $1.42 $1.49 $1.23
Electricity delivered (million mwhrs) 75 75 72
Gas throughput (bcf) 373 364 357
Presented below are the key factors impacting Dominion
Delivery’s operating results:
2003 vs. 2002 2002 vs. 2001
Increase Increase
(Decrease) (Decrease)
Amount EPS Amount EPS
(millions, except EPS)
Revenue reallocation $50 $ 0.18 ——
Customer growth —
utility operations 10 0.03 $ 10 $ 0.04
Weather (5) (0.02) 50 0.20
Interest expense —— 14 0.06
Income taxes (9) (0.03) 18 0.07
Other (15) (0.05) 19 0.07
Share dilution — (0.18) — (0.18)
Change in net
income contribution $31 $(0.07) $111 $ 0.26
2003 vs. 2002
Dominion Delivery’s net income contribution rose $31 million from
2002, primarily reflecting:
• A change in the allocation of electric base rate revenue
among Dominion Generation, Dominion Energy and Dominion
Delivery effective January 1, 2003;
• Customer growth in the electric and gas franchise service
area, primarily reflecting new residential electric customers;
• A decrease in regulated electric sales due to comparably
milder weather in Dominion’s electric utility service territories off-
set by the increase in regulated gas sales due to comparably
colder weather in Dominion’s gas utility service territories;
• A decrease in pension credits and an increase in other postre-
tirement benefit costs and
• The deferral of 2003 bad debt expenses as regulatory assets,
pending future recovery under a bad debt rider approved by the
Public Utility Commission of Ohio, effective January 1, 2003.
2002 vs. 2001
Dominion Delivery’s net income contribution rose $111 million
over 2001, primarily reflecting:
• Customer growth in the electric and gas franchise service
area, primarily reflecting new residential electric customers;
• Comparably warmer weather, resulting in increased summer
sales in Dominion’s electric service territories and comparably