Dominion Power 2004 Annual Report Download - page 50

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
fluctuated significantly and will continue to be subject to volatility. Any
such review in the future, which would be highly dependent on assump-
tions considered appropriate at the time, could possibly result in the recog-
nition of plant impairment or contract losses that would be material to
Dominion’s results of operations or its financial position.
Changes to Cost Structure
— In April 2004, the Governor of Virginia
signed into law amendments to the Virginia Restructuring Act and the Vir-
ginia fuel factor statute. The amendments extend capped base rates until
December 31, 2010, unless capped rates are terminated earlier under the
Virginia Restructuring Act. The generation-related cash flows provided by
the Virginia Restructuring Act are intended to compensate Dominion for
continuing to provide generation services and to allow Dominion to incur
costs to restructure such operations during the transition period. As a
result, during the transition period, Dominion’s earnings may increase to
the extent that it can reduce operating costs for its utility generation-
related operations. Conversely, the same risks affecting the recovery of
Dominion’s stranded costs, discussed above, may also adversely impact its
cost structure during the transition period. Accordingly, Dominion could
realize the negative economic impact of any such adverse event. In addi-
tion to managing the cost of its generation-related operations, Dominion
may also seek opportunities to sell available electric energy and capacity
to customers beyond its electric utility service territory. Using cash flows
from operations during the transition period, Dominion may further alter its
cost structure or choose to make additional investment in its business.
The capped rates were derived from rates established as part of the
1998 Virginia rate settlement and do not provide for specific recovery of
particular generation-related expenditures, except for certain regulatory
assets. To the extent that Dominion manages its operations to reduce its
overall operating costs below those levels included in the capped rates,
Dominion’s earnings may increase. Since the enactment of the Virginia
Restructuring Act, Dominion has been reviewing its cost structure to
identify opportunities to reduce the annual operating expenses of its
generation-related operations. In the period 2001 through 2004,
Dominion negotiated the termination of several long-term power
purchase agreements that is expected to reduce capacity payments in
2005 by $179 million.
Common Stock Dividend Increase
In July 2004, Dominion announced that its fourth-quarter dividend payable
December 20, 2004, would be increased by 2 cents per share to 66.5 cents
per share. In February 2005, the quarterly dividend rate increased again
from 66.5 cents per share to 67 cents per share for an annual rate in 2005
of $2.68 per share. Dominion’s expected cash flow and earnings should
enable it to make future annual increases when its board of directors
deems it financially prudent. Common stock dividends are declared on a
quarterly basis by the board of directors.
Statoil ASA (Statoil) Agreement
In June 2004, Dominion executed 20-year contracts with Statoil for the
increased capacity planned for its Cove Point LNG facility and related gas
transmission services. Under the terms of the agreements, Statoil will pur-
chase firm LNG tanker discharge services and related transportation ser-
vice from Cove Point, as well as downstream firm transportation and
storage services from DTI. Plans call for increasing the Cove Point storage
tank capacity to 14.6 bcf and the plant’s deliverability by 0.8 bcf per day to a
total of 1.8 bcf per day. To provide the transmission services, Dominion also
plans to expand its pipeline originating at Cove Point to deliver more nat-
ural gas to interstate pipeline connections in the Mid-Atlantic region as
well as to build a pipeline and two compressor stations in central Pennsyl-
vania. These projects are subject to regulatory approval and are expected
to be placed in service in 2008.
Environmental Matters
Dominion is subject to costs resulting from a number of federal, state and
local laws and regulations designed to protect human health and the envi-
ronment. These laws and regulations affect future planning and existing
operations. They can result in increased capital, operating and other costs
as a result of compliance, remediation, containment and monitoring obliga-
tions. Historically, Dominion recovered such costs arising from regulated
electric operations through utility rates. However, to the extent that envi-
ronmental costs are incurred in connection with operations regulated by
the Virginia Commission, during the period ending December 31, 2010, in
excess of the level currently included in the Virginia jurisdictional electric
retail rates, Dominion’s results of operations will decrease. After that date,
recovery through regulated rates may be sought for only those environmen-
tal costs related to regulated electric transmission and distribution opera-
tions and recovery, if any, through the generation component of rates will
be dependent upon the market price of electricity. Dominion also may seek
recovery through regulated rates for environmental expenditures related to
regulated gas transmission and distribution operations.
Environmental Protection and Monitoring Expenditures
Dominion incurred approximately $132 million, $113 million and $123 mil-
lion of expenses (including depreciation) during 2004, 2003 and 2002,
respectively, in connection with environmental protection and monitoring
activities, and expects these expenses to be approximately $203 million in
2005 and $215 million in 2006. In addition, capital expenditures related to
environmental controls were $94 million, $210 million and $280 million for
2004, 2003 and 2002, respectively. These expenditures are expected to be
approximately $123 million for 2005 and $207 million for 2006. The 2005
and 2006 amounts include planned expenditures for the newly acquired
USGen electric generating facilities.
Clean Air Act Compliance
The Clean Air Act requires Dominion to reduce its emissions of sulfur
dioxide (SO2) and nitrogen oxide (NOX), which are gaseous by-products
of fossil fuel combustion. The Clean Air Act’s SO2and NOXreduction
programs include:
•The issuance of a limited number of SO2emission allowances. Each
allowance permits the emission of one ton of SO2into the atmosphere.
The allowances may be transacted with a third party; and
•NOXemission limitations applicable during the ozone season months of
May through September and on an annual average basis.
Implementation of projects to comply with SO2and NOXlimitations are
ongoing and will be influenced by changes in the regulatory environment,
availability of allowances, various state and federal control programs and
emission control technology. In response to these requirements, Dominion
estimates it will make capital expenditures at its affected generating facili-
ties (including the newly acquired electric generating facilities from
USGen) of approximately $700 million during the period 2005 through 2009
for SO2and NOxemission control equipment.