Dominion Power 2004 Annual Report Download - page 29

D 2004/Page 27
Variability in expenses for Dominion Generation relates primarily to the
cost of fuel consumed, labor and benefits and the timing, duration and
costs of scheduled and unscheduled outages.
As discussed in further detail below, as a result of the reorganization
of the Dominion Energy Clearinghouse (Clearinghouse), Dominion
Generation’s 2004 and 2003 results now reflect revenues and expenses
associated with coal and emissions trading and marketing activities
performed by the Clearinghouse that were previously reported in the
Dominion Energy segment.
Dominion Energy includes the following operations:
•A regulated interstate gas transmission pipeline and storage system,
serving Dominion’s gas distribution businesses and other customers in
the Midwest, the Mid-Atlantic states and the Northeast;
•A regulated electric transmission system principally located in Virginia
and northeastern North Carolina;
•A liquefied natural gas (LNG) import and storage facility in Maryland;
•Certain gas production operations located in the Appalachian basin;
and
•Clearinghouse, which is responsible for energy trading, marketing,
hedging, arbitrage and gas aggregation activities.
Dominion Energy’s revenue and cash flows are derived from both regu-
lated and nonregulated operations.
Revenue and cash flow provided by regulated electric and gas trans-
mission operations and the LNG facility are based primarily on rates estab-
lished by the Federal Energy Regulatory Commission (FERC). Variability in
revenue and cash flow provided by these businesses results primarily from
changes in rates and the demand for services. Variability in expenses
relates largely to operating and maintenance expenditures, including
decisions regarding use of resources for operations and maintenance or
capital-related activities.
Revenue and cash flow for Dominion Energy’s nonregulated businesses
are subject to variability associated with changes in commodity prices.
Dominion Energy’s nonregulated businesses use physical and financial
arrangements to hedge this price risk. Certain hedging and trading activi-
ties may require cash deposits to satisfy margin requirements. In addition,
reported earnings for this segment reflect changes in the fair value of cer-
tain derivatives; these values may change significantly from period to
period. Variability in expenses for these nonregulated businesses relates
largely to labor and benefits and the costs of purchased commodities for
resale and payments under financially-settled contracts.
During the fourth quarter of 2004, Dominion performed an evaluation of
its Clearinghouse trading and marketing operations, which resulted in a
decision to exit certain energy trading activities and instead focus on the
optimization of company assets. Beginning in 2005, all revenues and
expenses from the Clearinghouse’s optimization of company assets will be
reported as part of the results of the business segments operating the
related assets, in order to better reflect the performance of the underlying
assets. As a result of these changes, 2004 and 2003 results now reflect
revenues and expenses associated with coal and emissions trading and
marketing activities in the Dominion Generation segment.
Dominion Delivery includes Dominion’s electric and gas distribution sys-
tems and customer service operations as well as retail energy marketing
operations. Electric distribution operations serve residential, commercial,
industrial and governmental customers in Virginia and northeastern North
Carolina. Gas distribution operations serve residential, commercial and
industrial gas sales and transportation customers in Ohio, Pennsylvania
and West Virginia. Retail energy marketing operations include the market-
ing of gas, electricity and related products and services to residential and
small commercial customers in the Northeast, Mid-Atlantic and Midwest.
Revenue and cash flow provided by electric and gas distribution opera-
tions are based primarily on rates established by state regulatory authori-
ties and state law. Variability in Dominion Delivery’s revenue and cash flow
relates largely to changes in volumes, which are primarily weather sensi-
tive. For local gas distribution operations, revenue may vary based upon
changes in levels of rate recovery for the cost of gas sold to customers.
Such costs and recoveries generally offset and do not materially impact net
income. Revenue from retail energy marketing operations may vary in con-
nection with changes in weather and commodity prices as well as the
acquisition and potential loss of customers.
Variability in expenses results from changes in the cost of purchased
gas and routine maintenance and repairs (including labor and benefits as
well as decisions regarding the use of resources for operations and mainte-
nance or capital-related activities). For gas distribution operations,
Dominion is permitted to seek recovery of the cost of gas sold to customers.
Dominion Exploration & Production includes Dominion’s gas and oil
exploration, development and production operations. These operations are
located in several major producing basins in the lower 48 states, including
the outer continental shelf and deepwater areas of the Gulf of Mexico, and
Western Canada.
Dominion Exploration & Production maintains an active and ongoing
drilling program focused on low risk development drilling in several proven
onshore regions of the United States and Western Canada, while also
maintaining some exposure to higher risk exploration opportunities. Signif-
icant development drilling programs are currently underway in West Texas,
the Appalachians and the Rocky Mountains where Dominion Exploration &
Production holds sizable acreage positions and operational experience.
While each region provides Dominion Exploration & Production with explo-
ration opportunities, most exploratory drilling takes place in the Gulf Coast
region, including the deepwater Gulf of Mexico.
Revenue and cash flow provided by exploration and production opera-
tions are based primarily on the production and sale of company-owned
natural gas and oil reserves. Variability in Dominion Exploration & Produc-
tion’s revenue and cash flow relates primarily to changes in commodity
prices, which are market based, and volumes, which are impacted by
numerous factors including drilling success, timing of development pro-
jects, as well as external factors such as the storm-related damage caused
by Hurricane Ivan. Dominion manages commodity price volatility by hedg-
ing a substantial portion of its near term expected production.
Variability in Dominion Exploration & Production’s expenses relates pri-
marily to changes in operating costs and production taxes, which tend to
increase or decrease with changes in gas and oil prices and the prevailing
cost environment. Commodity price changes place upward or downward
pressure on related exploration and production service industry costs,
while severance and property taxes vary based on changes in revenue. A
changing price environment impacts both operating costs and the cost of
acquiring, finding and developing natural gas and oil reserves.