Dominion Power 2004 Annual Report Download - page 34

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Results of Operations
Presented below is a summary of contributions by operating segments to
net income:
Year Ended December 31, 2004 2003 2002
(millions, except per share amounts)
Net Diluted Net Diluted Net Diluted
Income EPS Income EPS Income EPS
Dominion Generation $ 525 $ 1.59 $ 512 $ 1.60 $ 561 $ 1.98
Dominion Energy 190 0.57 346 1.09 268 0.95
Dominion Delivery 466 1.41 453 1.42 422 1.49
Dominion Exploration &
Production 595 1.80 415 1.30 380 1.34
Primary operating
segments 1,776 5.37 1,726 5.41 1,631 5.76
Corporate and Other (527) (1.59) (1,408) (4.41) (269) (0.94)
Consolidated $1,249 $ 3.78 $ 318 $ 1.00 $1,362 $ 4.82
Overview
2004 vs. 2003
Dominion earned $3.78 per diluted share on net income of $1.2 billion, an
increase of $2.78 per diluted share and $931 million. The per share amount
includes approximately $0.14 of share dilution, reflecting an increase in the
average number of common shares outstanding during 2004.
The combined net income contribution of Dominion’s primary operating
segments increased $50 million during 2004. See Note 27 to the Consoli-
dated Financial Statements for information about Dominion’s operating
segments. The increase is primarily due to:
•A lower contribution from regulated electric generation operations pri-
marily due to the elimination of fuel deferral accounting for the Virginia
jurisdiction, which resulted in the recognition of fuel expenses in
excess of amounts recovered in fixed fuel rates. These higher fuel costs
were partially offset by a reduction in capacity expenses due to the ter-
mination of certain long-term power purchase agreements and
increased revenue due to favorable weather and customer growth;
•Net realized gains (including investment income) associated with
nuclear decommissioning trust fund investments as opposed to net
realized losses (including investment income) during the prior year;
•A loss from energy trading and marketing activities, reflecting compar-
atively lower price volatility on natural gas option positions and the
effect of unfavorable price changes on electric trading margins, par-
tially offset by favorable margins in coal trading and marketing;
•A higher contribution from nonregulated retail energy marketing opera-
tions, primarily reflecting an increase in average customer accounts
and higher electric and gas margins; and
•A higher contribution from exploration and production operations due
to favorable changes in the fair value of certain oil options, higher
average realized prices for gas and oil and the recognition of business
interruption insurance revenue associated with the recovery of delayed
gas and oil production due to Hurricane Ivan. Results were also
affected by the recognition of revenue in connection with deliveries
under volumetric production payment (VPP) agreements, partially offset
by lower gas production, reflecting the sale of mineral rights under the
VPP agreements.
In addition to the higher contribution by the operating segments in
2004, the consolidated results include the impact of several specific
items recognized in 2004 and reported in the Corporate and Other
segment, including:
•A $112 million after-tax charge reflecting Dominion’s valuation of its
interest in a long-term power tolling contract, which is subject to a
planned divestiture in the first quarter of 2005, as a result of its exit
from certain energy trading activities. The charge is based on
Dominion’s evaluation of preliminary bids received from third parties,
reflecting the expected amount of consideration that would be required
by a third party for its assumption of Dominion’s interest in the contract;
•$61 million of after-tax losses related to the discontinuance of hedge
accounting for certain oil hedges resulting from an interruption of
oil production in the Gulf of Mexico caused by Hurricane Ivan, and
subsequent changes in the fair value of those hedges during the
third quarter;
•$61 million of after-tax charges related to Dominion’s investment in and
planned divestiture of DCI assets;
•$43 million of net after-tax charges resulting from the termination of
certain long-term power purchase agreements;
•$13 million of after-tax losses associated with Dominion’s telecommuni-
cations business, which was sold during 2004; partially offset by
•A $28 million after-tax benefit associated with the disposition of CNG
International’s (CNGI) investment in Australian pipeline assets that
were sold during 2004.
Additionally, the improved consolidated results reflect the impact of
significant specific items recognized in 2003. These items were reported in
the Corporate and Other segment and are discussed in further detail below.
2003 vs. 2002
Dominion earned $1.00 per diluted share on net income of $318 million, a
decrease of $3.82 per diluted share and $1.0 billion. The per share decrease
includes approximately $0.13 of share dilution, reflecting an increase in the
average number of common shares outstanding during 2003.
The combined net income contribution of Dominion’s primary operating
segments increased $95 million in 2003. This increase largely reflects the
benefits of higher natural gas prices during 2003 on sales of Dominion’s
gas and oil production as well as margins associated with gas trading
activities. This increased contribution by the operating segments was more
than offset by significant specific charges recognized in 2003 and reported
in the Corporate and Other segment, including:
•$750 million of after-tax losses associated with Dominion’s discontin-
ued telecommunications business;
•$122 million of after-tax incremental expenses associated with Hurri-
cane Isabel;
•$96 million of after-tax charges for DCI asset impairments;
•$69 million of after-tax charges for asset impairments related to certain
investments held for sale;
•$104 million of after-tax charges associated with the termination of cer-
tain long-term power purchase agreements and the restructuring of
power sales agreements; and
•$16 million of after-tax severance costs for workforce reductions.