Dominion Power 2004 Annual Report Download - page 9

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D 2004/Page 7
In the short-term,
the new
law reduces our
earnings.
We have gained
rate certainty
at Dominion Virginia
Power, our
biggest operating
subsidiary, where
base rates are
frozen through 2010.
Another important measure indicating
the increasing strength of our credit pro-
file is the number of times funds from
operations can cover interest payments.
At year’s end, we had boosted this
adjusted measure to 4.4 times and
expect this critical metric to stand at
5 times by the end of 2005. Our credit
ratings at Standard & Poor’s (BBB+) and
Moody’s (Baa1) remain unchanged.
Reconciliations to GAAP of our free
cash flow, capitalization ratio and inter-
est coverage appear on pages 24 and 25.
Let’s turn from the hard metrics to
some broader “hits and misses” on our
2004 scorecard that have longer-term
importance.
Hit: New Law That Creates
Rate Certainty in Virginia
An important new law passed by the
Virginia legislature last year ultimately
positions us to benefit by managing our
fuel use and fuel production in tandem.
Senate Bill 651 is unique in the nation.
We have gained rate certainty at
Dominion Virginia Power, our biggest
operating subsidiary, where base rates
are frozen through 2010.
In return, we have a powerful eco-
nomic incentive to manage fuel costs
smarter. The legislation provides a fixed
allowance for fuel costs until mid-2007,
when it will be evaluated for adjustment.
Shareholders assume the risk if costs
exceed this allowance and may realize
benefits if the allowance exceeds costs.
Dominion Virginia Power customers
benefit knowing that electricity rates
won’t be going up. Investors gain
revenue stability and upside from produc-
tivity and other savings that I’ll highlight
later. If we can run our plants even more
efficiently than we already are, we can
invest these savings into growth opportu-
nities and share the benefits of earnings
growth with our shareholders.
Miss: Transitional Fuel Costs of
New Virginia Law
In the short-term, the new law reduces
our earnings. We didn’t foresee that this
piece of legislation would be signed into
law until after we had already hedged
our 2004 natural gas and oil production.
This cost us dearly—to the tune of
$124 million in unrecovered after-tax
fuel costs.
In 2005, we project an estimated
$136 million in total after-tax under-
recovered fuel costs at Dominion Virginia
Power. This is based on expected usage,
actual prices for contracted fuel
volumes and projected market prices
for unhedged fuel.
However, as unhedged gas and oil
production becomes available, we will be
in a more balanced position with more
production available for sale in today’s
price environment.