Dominion Power 2001 Annual Report Download - page 36

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Accounting for gas and oil operations
— Dominion fol-
lows the full cost method of accounting for gas and oil explo-
ration and production activities prescribed by the SEC. Under
the full cost method, all direct costs of property acquisition,
exploration and development activities are capitalized. Deprecia-
tion of gas and oil producing properties is computed using the
unit-of-production method. The depreciable base of costs
includes estimated future costs to be incurred in developing
proved gas and oil reserves, as well as dismantlement and aban-
donment costs, net of projected salvage values. The calculations
under this accounting method are dependent on engineering
estimates of proven reserve quantities and estimates of the
amount and timing of future expenditures to develop the proven
reserves. Actual reserve quantities and development expendi-
tures may differ from the forecasted amounts. Also, amounts
capitalized in the depreciable base of costs are subject to a ceiling
test. The test limits capitalized amounts to a ceiling—the pre-
sent value of estimated future net revenues to be derived from
the production of proved gas and oil reserves. Dominion per-
forms the test quarterly, on a country-by-country basis, and
would recognize asset impairments to the extent capitalized
costs exceed the ceiling. See Notes 2 and 31 to the Consolidated
Financial Statements.
Accounting for regulated operations — Methods of
allocating costs to accounting periods for operations subject to
federal or state cost-of-service rate regulation may differ from
accounting methods generally applied by nonregulated compa-
nies. When the timing of cost recovery prescribed by regulatory
authorities differs from the timing of expense recognition used
for accounting purposes, Dominion’s consolidated financial
statements may recognize a regulatory asset for expenditures that
otherwise would be expensed. Regulatory assets represent proba-
ble future revenue associated with certain costs that will be
recovered from customers through the ratemaking process.
Regulatory liabilities represent probable future reductions in
revenues associated with amounts that are to be credited to
customers through the ratemaking process. See Notes 2, 9, and
18 to the Consolidated Financial Statements.
Results of Operations
Dominion’s discussion of its results of operations includes a sum-
mary of contributions by the operating segments to net income
and diluted earnings per share, an overview of consolidated 2001
and 2000 results of operations and more detailed discussion of
the results of operations of the operating segments.
2001 2000 1999
(millions, except per Net Net Net
share amounts) Income EPS Income EPS Income EPS
Dominion Energy $ 723 $2.86 $ 489 $ 2.07 $ 271 $ 1.42
Dominion Delivery 366 1.45 339 1.43 175 0.91
Dominion E&P 320 1.27 255 1.08 44 0.23
Dominion Capital (14) (0.06) 11 0.05 78 0.41
1,395 5.52 1,094 4.63 568 2.97
Corporate and Other (851) (3.37) (658) (2.78) (271) (1.42)
Consolidated Total 544 2.15 436 1.85 297 1.48
Consolidated Operating
Revenue 10,558 9,246 5,520
Consolidated Operating
Expense $8,773 $7,731 $4,192
For additional information about Dominion’s operating seg-
ments, see Note 30 to the Consolidated Financial Statements and
the following discussion of each segment’s results of operations.
Overview of 2001 Results
Dominion earned $2.15 per diluted share in 2001 reflecting
net income of $544 million and an increase of $108 million
and $0.30 per diluted share over 2000. As described below,
Dominion recognized higher overall operating revenue reflecting
the operations of acquired businesses. This increase was partially
offset by comparatively milder weather and higher operating
expenses. The increase in operating expenses reflected the recog-
nition of charges associated with the impairment of certain
investments at DCI, restructuring activities, and credit-related
exposures associated with the bankruptcy of Enron Corp. and
certain subsidiaries (Enron).
Operating Revenue
Operating revenue increased $1.3 billion to $10.6 billion for
2001 as compared to 2000. Dominion acquired Millstone Power
Station (Millstone) on March 31, 2001 and its operations con-
tributed largely to the increase in nonregulated electric sales.
Regulated electric sales also increased, reflecting comparatively
higher fuel recovery rates and continued customer growth
partially offset by comparatively mild weather. Regulated gas
sales, nonregulated gas sales and gas and oil production revenue
increased as 2000 results only included 11 months of Consoli-
dated Natural Gas Company (CNG) operations. In addition,
2001 reflects the inclusion of Louis Dreyfus Natural Gas Corp.
(Louis Dreyfus) for two months as well as higher realized prices
for gas. The results of Dominion’s trading and marketing opera-
tions, which are recorded as nonregulated gas and nonregulated
electric sales, net of cost of sales, also contributed to the overall
increase in operating revenue.
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