Dominion Power 2001 Annual Report Download - page 38

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
2001 Results
Dominion Energy contributed $723 million and $2.86 per
diluted share for 2001, an increase of $234 million and $0.79
per diluted share over 2000 results. The increase in net income
reflects higher revenues due to a full year of CNG operations for
2001, the acquisition of Millstone and reductions in certain
operating expenses, including depreciation associated with
nuclear plant relicensing and capacity expenses.
Operating Revenue
Operating revenue increased $1.3 billion to $6.1 billion for 2001
as compared to 2000 reflecting the acquisition of Millstone and
a full year of CNG operations for 2001. Regulated electric sales
for 2001 reflected customer growth and comparatively higher
fuel rates; however, these increases were largely offset by compar-
atively mild weather. Millstone operations contributed largely
to the increase in nonregulated electric sales. Nonregulated
gas sales and gas transportation and storage revenue increased
reflecting a full year of CNG operations and increased trans-
portation rates. The results of Dominion’s trading and market-
ing operations contributed to the overall increase in operating
revenue. The 2001 results also included sales to other Dominion
segments of $143 million.
Operating Expenses
Operating expenses increased $810 million to $4.7 billion for
2001 as compared to 2000. Higher commodity prices contributed
to increased electric fuel and energy purchases and purchased
gas. In addition, purchased gas increased because 2000 expenses
included only 11 months of CNG operations. Depreciation
increased overall due to the inclusion of Millstone. This increase
was partially offset by an extension of the useful lives of
Dominion’s nuclear plants in connection with the expected
relicensing of those plants. This change in estimate resulted in a
$78 million decrease in depreciation expense. Purchased capacity
decreased as Dominion terminated certain contracts in early
2001. Other operations and maintenance increased due to the
inclusion of Millstone operations and scheduled outages at both
nuclear and fossil plants.
2000 Results
Dominion Energy contributed $489 million and $2.07 per
diluted share for 2000, an increase of $218 million and $0.65
per diluted share over 1999 results. The increase in net income
reflects primarily the inclusion of CNG operations.
Operating Revenue
Operating revenue increased $1.2 billion to $4.9 billion for 2000
as compared to 1999 reflecting primarily the inclusion of CNG
operations for 2000. The introduction of gas transportation and
storage in 2000 and increases in nonregulated gas sales and
other revenue resulted from the inclusion of CNG operations
beginning in late January 2000. Regulated electric sales
increased as a result of customer growth, higher fuel rates, and
a charge in 1999 for rate refunds. Nonregulated electric sales
decreased for 2000 reflecting a decrease in available capacity
after the expiration of two major long-term power purchase
contracts late in 1999. 2000 results also included sales to other
Dominion segments of $163 million.
Operating Expenses
Operating expenses increased $969 million to $3.9 billion for
2000 as compared to 1999. The introduction of purchased gas
and liquids, pipeline capacity and other purchases in 2000, as
well as increases in other operations and maintenance expense
and depreciation resulted from the inclusion of CNG operations
beginning in late January 2000. Electric fuel and energy pur-
chases increased in 2000 due to increased generation activity
and higher costs for fossil fuels consumed and energy purchases.
Selected Information — Energy Trading Activities
Dominion Energy manages Dominion’s energy trading, hedging
and arbitrage activities through the Dominion Energy Clearing-
house (the Clearinghouse). Dominion believes these operations
complement its integrated energy businesses and facilitate its risk
management activities. As part of these operations, the Clear-
inghouse enters into contracts for purchases and sales of energy-
related commodities, including natural gas, electricity and oil.
Settlement of a contract may require physical delivery of the
underlying commodity or, in some cases, an exchange of cash.
These contracts are classified as energy trading contracts for
financial accounting purposes, and are included in the Consoli-
dated Balance Sheets as components of current and non-current
derivative and energy trading assets and liabilities.
In accordance with generally accepted accounting princi-
ples, Dominion reports energy trading contracts in its financial
statements at fair value. Both realized and unrealized changes in
these contracts’ fair value are included in net income. For a
discussion of how Dominion determines fair value for its energy
trading contracts, see Critical Accounting Policies presented
earlier in MD&A. Arbitrage activities constitute a substantial
portion of the Clearinghouse’s activities. Accordingly, when the
Clearinghouse enters into a contract to purchase a commodity,
it typically enters into a sales contract, or a combination of sales
contracts, with quantities and delivery or settlement terms that
are identical or very similar to those of the purchase contract.
When the purchase and sales contracts are settled either by
physical delivery of the underlying commodity or by net cash
settlement, the Clearinghouse may receive a net cash margin
(a realized gain), or sometimes will pay a net cash margin
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