Dominion Power 2005 Annual Report Download - page 34

Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
32 Dominion 2005
trading purposes. Under our derivative income statement classifica-
tion policy described in Note 2 to our Consolidated Financial State-
ments, all changes in fair value, including amounts realized upon
settlement, related to the reclassified contracts were previously
presented in operating revenue on a net basis. Upon reclassifica-
tion as non-trading, all unrealized changes in fair value and settle-
ments related to those derivative contracts that are financially
settled are now reported in other operations and maintenance
expense. The statement of income related amounts for those
reclassified derivative sales contracts that are physically settled are
now presented in operating revenue, while the statement of income
related amounts for physically settled purchase contracts are
reported in operating expenses.
Year Ended December 31, 2005 2004 2003
(millions)
Sale activity included in operating revenue $377 $290 $181
Purchase activity included in operating expenses(1) 362 271 163
(1) Included in other energy-related commodity purchases
In September 2005, the FASB ratified the EITF’s consensus on
Issue No. 04-13, Accounting for Purchases and Sales of Inventory
with the Same Counterparty, that will require buy/sell and related
agreements to be presented on a net basis in our Consolidated
Statements of Income if they are entered into in contemplation of
one another. This new guidance is required to be applied to all new
arrangements entered into, and modifications or renewals of exist-
ing arrangements, for reporting periods beginning April 1, 2006. We
are currently assessing the impact that this new guidance may have
on our income statement presentation of these transactions; how-
ever, there will be no impact on our results of operations or cash
flows. See Note 4 to our Consolidated Financial Statements.
Overview
2005 vs. 2004
Our 2005 results were significantly impacted by Hurricanes Katrina
and Rita, which struck the Gulf Coast area in late August and late
September 2005, respectively. Due to the hurricanes, our produc-
tion assets in the Gulf of Mexico and, to a lesser extent, southern
Louisiana were temporarily shut in. The interruption in gas and oil
production resulted in a $272 million after-tax loss related to the
discontinuance of hedge accounting for certain gas and oil hedges.
Results were also impacted by delays in production caused by
damage to third-party downstream infrastructure.
Our 2005 results were also negatively impacted by increased
fuel and purchased power expenses incurred by our electric utility
operations primarily as a result of higher commodity prices. These
negatives were partially offset by higher realized gas and oil prices
for our exploration and production operations, gains on the sale of
excess emissions allowances and a higher contribution from mer-
chant generation operations primarily reflecting the benefit of two
acquisitions during 2005. In January 2005, we completed the
acquisition of three fossil fired power stations with generating
capacity of more than 2,700 megawatts (Dominion New England)
and in July 2005, we completed the acquisition of the 556-
megawatt Kewaunee nuclear power station (Kewaunee).
2004 vs. 2003
Our results for 2004 improved dramatically reflecting the absence
of $750 million of after-tax losses recognized in 2003 associated
with our discontinued telecommunications business that we sold in
May 2004. Other positive drivers included higher average realized
gas and oil prices and a favorable change in the fair value of certain
oil options held by our exploration and production operations. These
positives were partially offset by increased fuel expenses incurred
by electric utility operations as a result of the elimination of
deferred fuel accounting, a loss from energy trading and marketing
activities reflecting comparatively lower price volatility on natural
gas option positions and the effect of unfavorable price changes on
electric trading margins and an after-tax charge related to our inter-
est in a long-term power tolling contract that was divested in 2005,
in connection with our exit from certain energy trading activities.
Crude oil buy/sell arrangements
We enter into buy/sell and related agreements primarily as a means
to reposition our offshore Gulf of Mexico crude oil production to
more liquid marketing locations onshore. We typically enter into
either a single or a series of buy/sell transactions in which we sell
our crude oil production at the offshore field delivery point and buy
similar quantities at Cushing, Oklahoma for sale to third parties. We
are able to enhance profitability by selling to a wide array of refiners
and/or trading companies at Cushing, one of the largest crude oil
markets in the world, versus restricting sales to a limited number of
refinery purchasers in the Gulf of Mexico.
Under the primary guidance of EITF Issue No. 99-19, Reporting
Revenue Gross as a Principal versus Net as an Agent, we present
the sales and purchases related to our crude oil buy/sell arrange-
ments on a gross basis in our Consolidated Statements of Income.
These transactions require physical delivery of the crude oil and the
risks and rewards of ownership are evidenced by title transfer,
assumption of environmental risk, transportation scheduling and
counterparty nonperformance risk. Amounts currently shown on a
gross basis in our Consolidated Statements of Income are summa-
rized below.
Results of Operations
Presented below is a summary of our consolidated results:
Year Ended December 31, 2005 $ Change 2004 $ Change 2003
(millions, except EPS)
Net Income $1,033 $ (216) $1,249 $ 931 $ 318
Diluted earnings per share (EPS) 3.00 (0.78) 3.78 2.78 1.00