Dominion Power 2005 Annual Report Download - page 40

Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
38 Dominion 2005
Presented below, on an after-tax basis, are the key factors
impacting Dominion Generation’s net income contribution:
2005 vs. 2004
Increase (Decrease)
Amount EPS
(millions, except EPS)
Fuel expenses in excess of rate recovery $(280) $(0.85)
Interest and other financing expense(1) (51) (0.15)
Energy marketing and risk management activities(2) (50) (0.15)
Salaries, wages and benefits expense (36) (0.11)
Merchant generation(3) 103 0.31
Sales of excess emissions allowances 63 0.19
Energy supply margin(4) 40 0.12
Purchased electric capacity expense 37 0.11
Regulated electric sales:
Weather 39 0.12
Customer growth 24 0.07
Other (12) (0.04)
Share dilution — (0.04)
Change in net income contribution $(123) $(0.42)
(1) Represents higher interest rates on affiliate borrowings and variable rate debt, prepayment
penalties resulting from the early redemption of debt and the lease financing of Fairless.
(2) Reflects lower gains in 2005 from coal trading and marketing activities and current year
losses related to risk management activities and legacy power transactions.
(3) Primarily represents contributions from Dominion New England and Kewaunee, partially
offset by a lower contribution from the Millstone power station due to an additional planned
outage in 2005.
(4) Higher energy supply margins reflect a benefit related to financial transmission rights
realized in our utility operations.
2004 vs. 2003
Increase (Decrease)
Amount EPS
(millions, except EPS)
Nuclear decommissioning trust investment performance $ 38 $0.12
Purchased electric capacity expense 36 0.11
Coal trading and marketing(1) 31 0.10
Regulated electric sales:
Customer growth 20 0.06
Weather 10 0.03
Fuel expenses in excess of rate recovery (115) (0.36)
Other (7) (0.02)
Share dilution — (0.05)
Change in net income contribution $ 13 $(0.01)
(1) Increased contribution primarily due to higher coal prices and increased sales volumes.
Dominion E&P
Dominion E&P includes our gas and oil exploration, development
and production business. Operations are located in several major
producing basins in the lower 48 states, including the outer conti-
nental shelf and deepwater areas of the Gulf of Mexico, and West-
ern Canada.
Presented below, on an after-tax basis, are the key factors
impacting Dominion E&P’s net income contribution:
2005 vs. 2004
Increase (Decrease)
Amount EPS
(millions, except EPS)
Operations and maintenance(1) $(134) $(0.41)
Gas and oil — production(2) (111) (0.34)
Interest expense(3) (25) (0.08)
Gas and oil — prices 185 0.56
Business interruption insurance — Hurricane Ivan 50 0.15
Other 5 0.02
Share dilution — (0.06)
Change in net income contribution $ (30) $(0.16)
(1) Reflects the impact in 2004 of favorable changes in the fair value of certain oil options, an
increase in hedge ineffectiveness expense in 2005 and the discontinuance of hedge
accounting for certain oil hedges in March 2005 largely resulting from delays in reaching
anticipated production levels in the Gulf of Mexico, and subsequent changes in the fair value
of those hedges, partially offset by a benefit reflecting the impact of a decrease in gas and
oil prices on hedges that were de-designated following Hurricanes Katrina and Rita.
(2) Reflects interruptions caused by Hurricanes Katrina and Rita and the sale of the majority of
our natural gas and oil properties in British Columbia, Canada in December 2004.
(3) Represents the combined impact of an increase in affiliate borrowings and higher interest
rates, as well as prepayment penalties resulting from the early redemption of Canadian debt.
2004 vs. 2003
Increase (Decrease)
Amount EPS
(millions, except EPS)
Gas and oil — prices $ 67 $ 0.21
Business interruption insurance — Hurricane Ivan 61 0.19
Gas and oil — production 40 0.13
Operations and maintenance(1) 26 0.08
DD&A(2) (17) (0.05)
Other 3 0.01
Share dilution — (0.07)
Change in net income contribution $180 $ 0.50
(1) Lower operations and maintenance expenses, primarily due to favorable changes in the fair
value of certain oil options, partially offset by an increase in production costs.
(2) Higher depreciation, depletion and amortization, primarily reflecting higher industry finding
and development costs and increased acquisition costs.
Included below are the volumes and weighted average prices
associated with economic hedges in place as of December 31,
2005 by applicable time period. Prior cash flow hedges for which
hedge accounting was discontinued due to production interruptions
caused by Hurricanes Katrina and Rita, and for which amounts
were reclassified from AOCI to earnings upon the discontinuance of
hedge accounting, are excluded from the following table:
Natural Gas Oil
Hedged Average Hedged Average
Production Hedge Price Production Hedge Price
Year (bcf) (per mcf) (million bbls) (per bbl)
2006 219.8 $4.72 12.7 $25.25
2007 202.2 5.60 10.0 33.41
2008 54.0 6.49 5.0 49.36