Dominion Power 2004 Annual Report Download - page 38

D 2004/Page 36
Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
•A $363 million increase associated with regulated gas operations
discussed above in
Regulated gas sales revenue .
Liquids, pipeline capacity and other purchases expense increased 194%
to $468 million, reflecting primarily the reclassification of certain purchase
contracts for transportation, storage, coal and emissions allowances due
to the adoption of EITF 02-3.
Other operations and maintenance expense rose 33% to $2.9 billion,
primarily reflecting the following specific items:
•$197 million of incremental restoration expenses associated with Hurri-
cane Isabel;
•$108 million of asset and goodwill impairments associated with DCI’s
financial services operations;
•$105 million of expenses associated with the termination of certain
long-term power purchase contracts used in electric utility operations;
•A $64 million charge for the restructuring of certain electric sales con-
tracts recorded as derivative assets;
•A $60 million goodwill impairment associated with the purchase of the
remaining interest in the telecommunications joint venture held by
another party;
•$86 million of accretion expense for AROs;
•An $87 million increase in expense resulting from a decrease in net
pension credits and an increase in other postretirement benefit costs;
partially offset by
•A $15 million decrease in expenses associated with nuclear outages
for refueling.
Other taxes increased 11% to $476 million, primarily due to higher sev-
erance taxes and gross receipts taxes, as well as the effect of a favorable
resolution of sales and use tax issues in 2002. Such benefits were not
recognized in 2003.
Other income decreased 138% to a net loss of $40 million, which
included the following items:
•$57 million of costs associated with the acquisition of DFV senior notes;
•$27 million for the reallocation of equity losses between Dominion and
the minority interest owner of DFV;
•$62 million for the impairment of certain equity-method investments;
and
•A $32 million increase in net realized losses (including
investment income) associated with nuclear decommissioning
trust fund investments.
Partially offsetting these reductions to other income was an increase of
$28 million, reflecting equity losses on Dominion’s investment in DFV in
2002; DFV was consolidated beginning in the first quarter of 2003. In 2003,
the operating losses of DFV’s subsidiary, Dominion Telecom, Inc., were
classified in discontinued operations.
Income taxes
— Dominion’s effective tax rate increased 5.3% to 38.6%
for 2003. The increase primarily resulted from the expiration of nonconven-
tional fuel credits beginning in 2003, an increase in the valuation
allowance related to the impairment of goodwill associated with the
telecommunications investment and federal loss carryforwards at CNGI
and DCI that are not expected to be utilized, partially offset by a reduction
in Canadian tax rates applied to deferred tax balances.
Loss from discontinued operations reflects the results of operations of
Dominion’s telecommunications business, which is classified as held for
sale. The loss includes the following:
•Impairment of network assets and related inventories of $566 million.
Dominion did not recognize any deferred tax benefits related to the
impairment charges, since realization of tax benefits is not anticipated
at this time based on Dominion’s expected future tax profile. In addi-
tion, Dominion increased the valuation allowance on deferred tax
assets recognized by its telecommunications investment, resulting in a
$48 million increase in deferred income tax expense; and
•Telecommunications operating losses of $28 million.
Cumulative effect of changes in accounting principles
— During 2003
Dominion was required to adopt several new accounting standards, result-
ing in a net after-tax gain of $11 million which included the following:
•A $180 million after-tax gain (SFAS No. 143), partially offset by;
•A $67 million after-tax loss (EITF 02-3);
•A $75 million after-tax loss (Statement 133 Implementation Issue
No. C20); and
•A $27 million after-tax loss (FIN 46R).
Outlook — Dominion
Dominion believes its operating businesses will provide growth in net
income on a per share basis, including the impact of higher expected aver-
age shares outstanding, in 2005.
Growth factors include:
•Continued growth in utility customers;
•Reduced electric capacity expenses, resulting from the termination of
long-term power purchase agreements;
•Oil production growth, reflecting a full year of Devils Tower and Front
Runner operations;
•A contribution from the operations of three USGen power stations
acquired in January 2005;
•Higher contribution from Cove Point operations due to expansion of the
facility; and
•A contribution from the Kewaunee nuclear power plant, expected to be
acquired in the first half of 2005.
The growth factors will be partially offset by:
•Higher expected Virginia jurisdictional fuel expenses;
•A lower contribution from Millstone resulting from an additional
refueling outage;
•Higher expected operating expenses for gas and oil production;
•An increase in incentive-based compensation expense if earnings
targets are met; and
•Increased interest expense.
Based on these projections, Dominion estimates that cash flow from
operations will increase in 2005, as compared to 2004. Management
believes this increase will provide sufficient cash flow to maintain or grow
Dominion’s current dividend to common shareholders.