Dominion Power 2005 Annual Report Download - page 30

Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
28 Dominion 2005
merchant fleet are located in Connecticut, Illinois, Indiana, Massa-
chusetts, Ohio, Pennsylvania, Rhode Island, West Virginia and Wis-
consin.
Dominion Generation’s earnings result from the generation and
sale of electricity. Due to 2004 deregulation legislation, revenues
for serving Virginia jurisdictional retail load are based on capped
rates through 2010 and fuel costs for the utility fleet, including
power purchases, are subject to fixed rate recovery provisions until
July 1, 2007, when a one-time prospective adjustment will be made
effective through December 2010. Changes in our utility operating
costs, particularly with respect to fuel and purchased power, rela-
tive to costs used to establish the rates, will impact Dominion
Generation’s earnings.
Variability in earnings provided by the merchant fleet relates to
changes in market-based prices received for electricity and the
demand for electricity, which is primarily weather driven. Variability
also results from changes in the cost of fuel consumed, labor and
benefits and the timing, duration and costs of scheduled and
unscheduled outages.
Dominion Exploration & Production (E&P) includes our gas
and oil exploration, development and production business. Opera-
tions are located in several major producing basins in the lower 48
states, including the outer continental shelf and deepwater areas of
the Gulf of Mexico, and Western Canada.
Dominion E&P generates income from the sale of natural gas
and oil we produce from our reserves. Variability relates primarily to
changes in commodity prices, which are market-based, and pro-
duction volumes, which are impacted by numerous factors includ-
ing drilling success, timing of development projects and external
factors such as storm-related damage caused by hurricanes. We
attempt to manage commodity price volatility by hedging a sub-
stantial portion of our expected production. These hedging activities
may require cash deposits to satisfy collateral requirements. We
attempt to mitigate the financial impact of storm-related delays in
production by maintaining business interruption insurance for our
offshore operations. Our business interruption insurance covers
delays caused by damage to both our production facilities and to
third-party facilities downstream.
Corporate includes the operations of our corporate, service
company and other operations (including unallocated debt), corpo-
rate-wide enterprise commodity risk management and optimization
services, the remaining assets of DCI, which are in the process of
being divested, the net impact of our discontinued telecommunica-
tions operations that were sold in May 2004 and specific items
attributable to our operating segments that are excluded from the
profit measures evaluated by management in assessing segment
performance or allocating resources among the segments.
Accounting Matters
Critical Accounting Policies and Estimates
We have identified the following accounting policies, including cer-
tain inherent estimates, that as a result of the judgments, uncer-
tainties, uniqueness and complexities of the underlying accounting
standards and operations involved, could result in material changes
to our financial condition or results of operations under different
conditions or using different assumptions. We have discussed the
development, selection and disclosure of each of these policies
with our Audit Committee.
Dominion Delivery includes our regulated electric and gas dis-
tribution and customer service business, as well as nonregulated
retail energy marketing operations. Electric distribution operations
serve residential, commercial, industrial and governmental cus-
tomers in Virginia and northeastern North Carolina. Gas distribution
operations serve residential, commercial and industrial gas sales
and transportation customers in Ohio, Pennsylvania and West Vir-
ginia. Nonregulated retail energy marketing operations include the
marketing of gas, electricity and related products and services to
residential, industrial and small commercial customers in the
Northeast, Mid-Atlantic and Midwest.
Revenue provided by electric and gas distribution operations is
based primarily on rates established by state regulatory authorities
and state law. The profitability of these businesses is dependent on
their ability, through the rates they are permitted to charge, to
recover costs and earn a reasonable return on their capital invest-
ments. Variability relates largely to changes in volumes, which are
primarily weather sensitive, and changes in the cost of routine
maintenance and repairs (including labor and benefits). Income
from retail energy marketing operations varies in connection
with changes in weather and commodity prices as well as the
acquisition and loss of customers.
Dominion Energy includes our tariff-based electric transmis-
sion, natural gas transmission pipeline and storage businesses and
the Cove Point liquefied natural gas (LNG) facility. It also includes
certain natural gas production located in the Appalachian basin and
producer services, which consist of aggregation of gas supply, mar-
ket-based services related to gas transportation and storage, asso-
ciated gas trading and the prior year’s results of certain energy
trading activities exited in December 2004. The electric transmis-
sion business serves Virginia and northeastern North Carolina and
on May 1, 2005, became a member of PJM Interconnection, LLC
(PJM), a regional transmission organization (RTO). As a result, we
integrated our control area into the PJM energy markets. The gas
transmission pipeline and storage business serves Dominion’s gas
distribution businesses and other customers in the Northeast,
Mid-Atlantic and Midwest.
Revenue provided by regulated electric and gas transmission
operations and the LNG facility is based primarily on rates approved
by the Federal Energy Regulatory Commission (FERC). The prof-
itability of these businesses is dependent on their ability, through
the rates they are permitted to charge, to recover costs and earn a
reasonable return on their capital investments. Variability results
from changes in rates, the demand for services, which is primarily
weather dependent, and operating and maintenance expenditures
(including labor and benefits).
Earnings from Dominion Energy’s nonregulated businesses are
subject to variability associated with changes in commodity prices.
Dominion Energy’s nonregulated businesses use physical and finan-
cial arrangements to attempt to hedge this price risk. Certain hedging
and trading activities may require cash deposits to satisfy collateral
requirements. Variability also results from changes in operating and
maintenance expenditures (including labor and benefits).
Dominion Generation includes the generation operations of
our electric utility and merchant fleet as well as energy marketing
and risk management activities associated with the optimization of
our generation assets. Our generation mix is diversified and
includes coal, nuclear, gas, oil, hydro and purchased power. The
generation facilities of our electric utility fleet are located in Virginia,
West Virginia and North Carolina. The generation facilities of our