Dominion Power 2006 Annual Report Download - page 32

Our businesses are managedthrough four primary operating
segments: Dominion Delivery, Dominion Energy, Dominion
Generation and Dominion E&P. The contributions to net
income by our primary operating segments are determined based
on ameasure of profit that we believe represents the segments’
core earnings.Asaresult, certain specific items attributable to
thosesegments are not included in profit measures evaluated by
management in assessingsegment performance or allocating
resources among the segments. Those specific items are reported
in the Corporate segment.
Revenue provided by our electric and gasdistribution oper-
ations 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 ratesweare permittedto
charge, to recover costs and earn areasonable return on our capi-
talinvestments. Variabilityin earnings relates largelyto 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 andloss of customers.
In March 2006, we entered into an agreementwith Equitable
Resources,Inc. to sell two ofourwholly-owned regulated gas dis-
tribution subsidiaries, Peoples and Hope for approximately $970
million plus adjustments to reflect capital expenditures and
changes in working capital. Peoples and Hope serve approx-
imately 500,000 customer accounts in Pennsylvania and West
Virginia. The transaction is expected to close by the end of second
quarter of 2007, subject tostate regulatory approvals in
Pennsylvania and West Virginia, as well as approval under the
Hart-Scott-Rodino Act.
Revenue provided by our regulated electric and gastrans-
missionoperationsandtheLNGfacility is based primarily on
rates established by the Federal Energy Regulatory Commission
(FERC). The profitability of these businesses is dependent on our
ability, through the ratesweare permittedtocharge, to recover
costs and earn areasonable return on our capital investments.
Variabilityin earnings results from changes in rates and the
demand forservices, which is primarily weather dependent.
Earnings from Dominion Energy’s nonregulated businesses are
subject tovariabilityassociated with changes in commodity
prices. Dominion Energy’s nonregulated businesses use physical
and financial arrangements to attempt to hedge this price risk.
Certain hedgingandtrading activities mayrequire cash deposits
to satisfy collateral requirements. Variabilityin earnings also
results from changes in operatingandmaintenance expenditures
(including labor and benefits).
Dominion Generation’s earnings primarily result from the
generation and sale of electricity. Due to 2004 deregulation legis-
lation, revenuesforserving Virginia jurisdictionalretail loadare
based on capped rates through 2010 and fuel costs forthe utility
fleet, including power purchases, are subject tofixedrate recovery
provisions until July1, 2007, at which time fuelrates will be
adjusted annually as discussed in Status ofElectric Restructuring in
Virginia under Future IssuesandOther Matters.Changes in our
utility operating costs, particularly with respect tofuel and pur-
chased power, relative to costs used to establish capped rates, will
impact our earnings.
Variabilityin earnings provided by the merchant fleet relates
to changes in market-based prices received forelectricity and the
demand forelectricity, which is primarily weather driven. We
manage price volatilitybyhedging asubstantial portion of our
expected sales. Variabilityalso results from changes in the cost of
fuel consumed, labor and benefits and the timing, duration and
costs of scheduled and unscheduled outages.
In December 2006, we reached an agreement withanentity
jointly owned by Tenaska Power Fund, L.P. and Warburg Pincus
LLC to sell three of our natural gas-fired merchant generation
peakingfacilities (Peaker facilities). Peakingfacilities are used
duringtimes of high electricity demand, generally in the summer
months. The Peaker facilities are:
Armstrong, a 625 Mw station in Shelocta, Pennsylvania;
Troy, a 600 Mw station in Luckey, Ohio; and
Pleasants, a313 Mw station in St. Mary’s, WestVirginia.
The sale is expected to result in proceeds of approximately
$256 million and should close in the first quarter of 2007, pend-
ing regulatory approval by FERC. We have obtained approval
from the Federal Trade Commission. No state regulatory appro-
vals are required.
We offeredthe facilities forsale following areview of our port-
folio of assets. We have decided not tosell afourth merchant
generation facility, State Line, a 515 Mw coal-fired facility in
Hammond, Indiana.
DOMINION2006 Annual Report 31
Dominion Delivery INCLUDESäOURäREGULATEDäELECTRICäANDäGAS
DISTRIBUTION AND CUSTOMER SERVICE BUSINESSES AS WELL AS NON
REGULATED RETAIL ENERGY MARKETING OPERATIONS /UR ELECTRIC DIS
TRIBUTION OPERATIONS SERVE RESIDENTIAL COMMERCIAL INDUSTRIAL AND
GOVERNMENTAL CUSTOMERS IN 6IRGINIA AND NORTHEASTERN .ORTH
#AROLINA /UR GAS DISTRIBUTION OPERATIONS SERVE RESIDENTIAL
COMMERCIAL AND INDUSTRIAL GAS SALES AND TRANSPORTATION CUSTOMERS
IN /HIO 0ENNSYLVANIA AND 7EST 6IRGINIA /UR NONREGULATED
RETAIL ENERGY MARKETING OPERATIONS MARKET GAS ELECTRICITY AND
RELATED PRODUCTS AND SERVICES TO RESIDENTIAL SMALL COMMERCIAL AND
INDUSTRIAL CUSTOMERS IN THE .ORTHEAST -ID!TLANTIC AND -IDWEST
Dominion Energy INCLUDESäOURäREGULATEDäELECTRICäTRANSMISSION
NATURAL GAS TRANSMISSION PIPELINE AND STORAGE BUSINESSESäANDäTHE
#OVE 0OINT LIQUEFIED NATURAL GAS ,.' IMPORT AND STORAGE
FACILITY )T ALSO INCLUDES GATHERING AND EXTRACTION ACTIVITIES AS
WELL AS CERTAIN !PPALACHIAN NATURAL GAS PRODUCTION $OMINION
%NERGY INCLUDES PRODUCER SERVICES WHICH CONSIST OF AGGREGATION OF
GAS SUPPLY MARKETBASED SERVICES RELATED TO GAS TRANSPORTATION AND
STORAGE ASSOCIATED GAS TRADING AND RESULTS OF CERTAIN ENERGY TRADING
ACTIVITIES EXITED IN $ECEMBER  4HE ELECTRIC TRANSMISSION
BUSINESS SERVES 6IRGINIA AND NORTHEASTERN .ORTH #AROLINA )N
 WE BECAME A MEMBER OF 0*- )NTERCONNECTION ,,#
0*- AN 24/ AND INTEGRATED OUR ELECTRIC TRANSMISSION FACILITIES
INTO 0*- WHOLESALE ELECTRICITY MARKETS 4HE GAS TRANSMISSION
PIPELINE AND STORAGE BUSINESS SERVES OUR GAS DISTRIBUTION BUSINESSES
AND OTHER CUSTOMERS IN THE .ORTHEAST -ID!TLANTIC AND -IDWEST
Dominion Generation INCLUDESäTHEäGENERATIONäOPERATIONSäOFä
OURäELECTRIC UTILITY AND MERCHANT FLEET AND UTILITY ENERGY SUPPLY
ENERGY MARKETING AND PRICE RISK MANAGEMENT ACTIVITIES FOR OUR
GENERATION ASSETS /UR GENERATION MIX IS DIVERSIFIED AND INCLUDES
COAL NUCLEAR GAS OIL HYDRO AND PURCHASED POWER 4HE GEN
ERATION FACILITIES OF OUR ELECTRIC UTILITY FLEET ARE LOCATED IN 6IRGINIA
7EST 6IRGINIA AND .ORTH #AROLINA 4HE GENERATION FACILITIES OF
OUR MERCHANT FLEET ARE LOCATED IN #ONNECTICUT )LLINOIS )NDIANA
-ASSACHUSETTS /HIO 0ENNSYLVANIA 2HODE )SLAND 7EST 6IRGINIA
AND 7ISCONSIN