Dominion Power 2006 Annual Report Download - page 37

MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Consolidated Balance Sheet now reflects the overfunded or under-
funded status of our defined benefit plans as an asset or aliability,
respectively, with previouslyunrecognized net actuarial gains or
losses, prior service costs or credits andtransition obligations
recognized as acomponent of either AOCI or regulatory assets or
liabilities.See Note 4to our Consolidated Financial Statements
foradiscussion of recently issued accounting standards that will
be adoptedin the future.
DOMINION CLEARINGHOUSE
During the fourth quarter of 2004, we performed an evaluation
of our Dominion Clearinghouse (Clearinghouse) tradingand
marketing operations, which resulted in adecision to exit certain
energy trading activities and instead focus on the optimization of
our assets. In January 2005, in connection with thereorganiza-
tion,commodity derivative contracts held by the Clearinghouse
were assessed to determine if they contribute to the optimization
of our assets. As aresult of this review, certain commodity
derivative contracts previously designated as held fortrading
purposes were redesignated as held fornon-trading purposes.
Under our derivative income statement classification policy
described in Note 2to our Consolidated Financial Statements, all
changes in fair value, including amounts realized upon settlement,
related to the reclassified contracts were previouslypresented in
operatingrevenue on a net basis. Upon redesignation as
non-trading, all unrealized changes in fair value and settlements
related to thosederivative contracts that are financially settled are
reported in other operationsandmaintenanceexpense. In addi-
tion,all physically-settled sales contracts are presented in operat-
ing revenue and all physically-settled purchase contracts are
presented in operatingexpense in our Consolidated Statements of
Income.
RESULTS OF OPERATIONS
Presented below is a summary of our consolidated results:
Year Ended
December 31, 2006 $Change 2005 $ Change 2004
(millions, except EPS)
Net Income $1,380 $ 347 $1,033 $(216) $1,249
Diluted earnings per
share (EPS) 3.93 0.93 3.00 (0.78) 3.78
Overview
2006 VS. 2005
Net income increased 34% to $1.4 billion. Favorable drivers
included increased gasand oil production, higherrealized prices
from our merchant generation business, an increased contribution
from ournonregulated retail energy marketing operations, higher
business interruption insurance proceeds received in 2006 than in
2005 and the absence of losses incurred in 2005 due to the dis-
continuance of hedge accounting for certain gas and oil hedges
resulting from hurricane-related interruptions of gasand oil
productionin the Gulf of Mexico. These favorabledrivers were
partially offset by an impairment charge related to the Peaker
facilities, milder weather in our gas and electric service territories,
lower realized gas prices for our E&P operations and a
reduction in gainsfrom sales of emissions allowances held for
consumption.
2005 VS. 2004
Our 2005 results were significantly impacted by Hurricanes
Katrina and Rita (2005 hurricanes), which struck the Gulf Coast
area in late August and late September 2005, respectively. Due to
the hurricanes, ourproductionassets in the Gulf of Mexico and,
to a lesser extent, southern Louisianawere temporarilyshut in.
The interruption in gas and oil production resulted in a$272
million after-tax loss related to the discontinuance of hedge
accounting for certain gas and oil hedges. Results were also
impacted by delays in productioncaused by damage to third-
party downstream infrastructure.
Our 2005 results were also negatively impacted by increased
fuel and purchased power expenses incurred by our electric utility
operations primarily as aresult of highercommodity prices. These
negatives were partially offset by higherrealized gas and oil prices
forour E&P operations, gainson the sale of emissions allowances
and ahighercontribution from merchant generation operations,
primarily reflecting the benefit of two acquisitions during 2005.
In January 2005, we completed the acquisition of threefossil-
fired power stations with generating capacity of more than 2,700
Mw (Dominion New England) and in July 2005, we completed
the acquisition of the 556 Mw Kewaunee nuclear power station
(Kewaunee).
Analysis of Consolidated Operations
Presented below are selected amounts related to our results of
operations:
Year ended December 31, 2006 $Change 2005 $ Change 2004
(millions)
Operating Revenue $16,482 $(1,489) $17,971 $4,042 $13,929
Operating Expenses
Electric fuel and
energy purchases 3,236 (1,434) 4,670 2,544 2,126
Purchased electric
capacity 481 (23) 504 (83) 587
Purchased gas 2,937 (1,004) 3,941 1,014 2,927
Other energy-related
commodity
purchases 1,022 (369) 1,391 402 989
Other operationsand
maintenance 3,280 226 3,054 299 2,755
Depreciation,
depletion and
amortization 1,606 209 1,397 108 1,289
Other taxes 575 (6) 581 62 519
Other income 174 6168 1167
Interest andrelated
charges 1,030 64 966 40 926
Income tax expense 920 332 588 (117) 705
Loss from discontinued
operations, net of tax (183) (175) (8) 16 (24)
An analysis of our results of operations for2006 compared to
2005 and 2005 compared to 2004 follows.
36 DOMINION2006 Annual Report