Dominion Power 2004 Annual Report Download - page 36

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
These increases in other revenue were largely offset by corresponding
increases in
Liquids, pipeline capacity and other purchases expense . Other
revenue for 2004 also includes $100 million from the recognition of busi-
ness interruption insurance revenue associated with the recovery of
delayed gas and oil production due to Hurricane Ivan.
Operating Expenses and Other Items
Electric fuel and energy purchases, net expense increased 30% to
$2.2 billion, primarily reflecting:
•A $408 million increase related to regulated utility operations resulting
from the combined effects of an increase in the fixed fuel rate and 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. The increase also reflects higher genera-
tion volumes in the current year;
•A $162 million increase related to nonregulated retail energy marketing
operations reflecting increased volumes ($153 million) and higher prices
($9 million);
•An $88 million increase related to merchant generation operations,
largely due to the commencement of commercial operations at Fairless,
partially offset by decreased fuel expense at certain other stations
resulting from lower generation volumes; partially offset by
•A $163 million decrease related to energy trading and marketing
activities.
Purchased gas, net expense increased 35% to $2.9 billion, principally
resulting from:
•A $274 million increase associated with producer services operations,
reflecting higher prices ($159 million) and increased volumes ($115 mil-
lion), as discussed above in
Nonregulated gas sales revenue ;
•A $130 million increase associated with regulated gas sales discussed
above in
Regulated gas sales revenue ;
•An $83 million increase associated with nonregulated retail energy
marketing operations, reflecting increased volumes ($56 million) and
higher prices ($27 million);
•A $66 million increase from gas transmission operations due to
increased gathering and extraction activities and higher gas usage; and
•A $58 million increase related to purchases of gas by exploration and
production operations to facilitate gas transportation and satisfy other
agreements, as discussed above in
Nonregulated gas sales revenue .
Liquids, pipeline capacity and other purchases expense increased 115%
to $1.0 billion, primarily reflecting a $348 million increase in the cost of coal
purchased for resale, a $105 million increase in emission credits purchased
and a $108 million increase related to purchases of oil by exploration and
production operations, each of which are discussed in
Other revenue .
Other operations and maintenance expense decreased 6% to $2.7 bil-
lion, resulting from:
•A $113 million net benefit due to favorable changes in the fair value of
certain oil options related to exploration and production operations.
During 2004, Dominion effectively settled certain oil options not desig-
nated as hedges by entering into offsetting option positions that had
the effect of preserving approximately $120 million in mark-to-market
gains attributable to favorable changes in time value; and
•The impact of the following charges recognized in 2003:
•$197 million of incremental restoration expenses associated with
Hurricane Isabel;
•$108 million of charges from asset and goodwill impairments asso-
ciated with DCI’s financial services operations;
•$105 million of charges associated with the termination of certain
long-term power purchase agreements;
•A $64 million charge for the restructuring of certain electric sales
contracts recorded as derivative assets;
•A $60 million goodwill impairment associated with the purchase of
the remaining interest in the telecommunications joint venture,
Dominion Fiber Ventures, LLC (DFV), held by another party;
•A $28 million charge related to severance costs for workforce
reductions; and
•A $22 million impairment related to CNGI’s generation assets that
were sold in December 2003.
These benefits were partially offset by the following charges and incre-
mental expenses recognized in 2004:
•A $184 million charge related to the valuation of Dominion’s interest in
a long-term power tolling contract;
•$96 million of 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;
•$72 million of charges associated with the impairment of retained
interests from mortgage securitizations and venture capital and other
equity investments held by DCI;
•$71 million of net expenses associated with the termination of certain
long-term power purchase agreements;
•An approximate $60 million increase in costs related to gas and oil pro-
duction activities;
•An $18 million increase in reliability expenses associated with utility
operations primarily due to increased tree-trimming;
•A $13 million increase related to salaries, wages and benefits resulting
from a $60 million increase in pension and medical benefits and a
$46 million increase due to wage increases and other factors, partially
offset by an $89 million decrease in incentive-based compensation
expense due to failure to meet targeted earnings goals; and
•$10 million of expenses associated with the sale of natural gas and oil
assets in British Columbia, Canada.
Depreciation, depletion and amortization expense (DD & A) increased
7% to $1.3 billion, largely due to incremental depreciation expense result-
ing from property additions, including those resulting from the consolida-
tion of certain variable interest entities as a result of adopting FIN 46R at
December 31, 2003.
Other taxes increased 9% to $519 million, primarily due to higher gross
receipts taxes and higher severance and property taxes associated with
increased commodity prices.
Other income increased to $186 million from a net loss of $40 million,
primarily reflecting:
•A $61 million increase resulting from net realized gains (including
investment income) associated with nuclear decommissioning trust
fund investments as opposed to net realized losses (including invest-
ment income) during the prior year;
•A $23 million benefit associated with the disposition of CNGI’s invest-
ment in Australian pipeline assets that were sold during 2004; and