Dominion Power 2006 Annual Report Download - page 43

MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
2005 VS. 2004
Increase (Decrease)
Amount EPS
(millions, except EPS)
Unrecovered Virginia fuel expenses $(280) $(0.85)
Energy marketing andrisk managementactivities(1)(50) (0.15)
Interest andotherfinancing expense(2)(44) (0.13)
Salaries, wages andbenefits expense (36) (0.11)
Merchant generation margin(3) 102 0.31
Sales of emissions allowances 63 0.19
Energy supply margin(4) 40 0.12
Regulated electric sales:
Weather 39 0.12
Customer growth 24 0.07
Purchased electric capacity expense 37 0.11
2005 North Carolina rate case settlement 10 0.03
Other (22) (0.07)
Share dilution —(0.05)
Change in net income contribution $(117) $(0.41)
(1) Reflects lower gains in 2005 from coal trading and marketing activities and
losses related to price risk management activities and legacy power trans-
actions.
(2) Represents higher interest rates on affiliate borrowings and variable rate debt,
prepayment penalties resulting from the early redemption of debt and the
lease financing of Fairless.
(3) Primarily represents contributions from Dominion New England and Kewau-
nee, partially offset by alower contribution from the Millstone power station
due to an additional scheduled outage in 2005.
(4) Higher energy supply margins reflect abenefit from FTRs in excess of con-
gestion costs at our utility operations.
Dominion E&P
Presented below are operating statistics related to Dominion
E&P’s operations:
Year Ended December 31, 2006 %Change 2005 % Change 2004
Gas production (bcf) 308 10% 280 (17)% 337
Oil production (million bbls) 24.7 61 15.3 13 13.6
Average realized prices
without hedging results:
Gas (per mcf)(1) $6.63 (17) $7.98 39 $5.74
Oil (per bbl) 54.66 10 49.54 40 35.49
Average realized prices with
hedging results(2):
Gas (per mcf)(1) 4.29 (9)4.73 16 4.08
Oil (per bbl) 33.39 11 30.21 20 25.11
DD&A (per mcfe) 1.71 16 1.47 13 1.30
Average production
(lifting) cost (per mcfe)(3)1.19 21.17 27 0.92
bbl =barrel
mcf = thousand cubic feet
mcfe = thousand cubic feet equivalent
(1) Excludes $262 million, $323 million and$223 million of revenue recognized
in 2006, 2005 and 2004, respectively, under the volumetric production pay-
ment (VPP) agreements described in Note 12 to our Consolidated Financial
Statements.
(2) Excludes the effects of the economic hedges discussed under Dominion
Energy.
(3) The inclusion of volumes produced and delivered under the VPP agreements
would have resultedinlifting costs of $1.06, $1.00 and $0.83 for 2006, 2005
and 2004, respectively.
Presented below, on an after-tax basis, are the key factors
impacting Dominion E&P’s net income contribution:
2006 VS. 2005
Increase (Decrease)
Amount EPS
(millions, except EPS)
Gas and oil—production(1) $406$1.18
Business interruption insurance 62 0.18
Operations and maintenance(2) 40 0.11
Gas and oil—prices (208) (0.60)
DD&A (162) (0.47)
Interest expense(3) (30) (0.09)
Other 70.02
Share dilution —(0.04)
Change in net income contribution $115 $0.29
(1) Represents an increase primarily in Gulf of Mexico deepwater and shelf gas
and oil production andRocky Mountain gas production.
(2) Primarily reflects the impact of mark-to-market gains associated with gas
hedges that were de-designated following the 2005 hurricanes, partially offset
by increased production costs and salaries, wages and benefits expense.
(3) Primarily reflects additional intercompany borrowings and higher interest rates
on those borrowings.
2005 VS. 2004
Increase (Decrease)
Amount EPS
(millions, except EPS)
Operations and maintenance(1) $(134) $(0.41)
Gas and oil—production(2) (111) (0.34)
Interest expense(3) (25) (0.08)
Gas and oil—prices 185 0.56
Business interruption insurance—Hurricane Ivan 50 0.15
Other 50.02
Share dilution —(0.06)
Change in net income contribution $(30) $(0.16)
(1) Reflects the absence of a2004 benefit from favorable changes in the fair
value of certain oil options, an increase in hedge ineffectiveness expense in
2005 and the discontinuance of hedge accounting for certain oil hedges in
March 2005 largely resulting from delays in reachinganticipated production
levelsinthe Gulf of Mexico, and subsequent changes in the fair value of those
hedges, partially offset by abenefit reflectingthe impact of adecrease in gas
and oil prices on hedges that were de-designated following the 2005 hurri-
canes.
(2) Reflects interruptions caused by the 2005 hurricanes and the sale of the
majority of our natural gas and oil properties in British Columbia, Canada in
December 2004.
(3) Represents the combinedimpact of an increase in affiliate borrowings and
higher interest rates, as well as prepayment penalties resulting from the early
redemption of Canadian debt.
Included below are the volumesandweighted average prices
associated with hedges in place as of December 31, 2006 by
applicable time period:
Natural Gas Oil
Year
Hedged
production
(bcf)
Average
hedge price
(per mcf)
Hedged
production
(million bbls)
Average
hedge price
(per bbl)
2007 225.2 $5.90 10.0 $33.41
2008 174.9 8.23 5.0 49.36
2009 36.6 7.97 0.3 75.36
42 DOMINION2006 Annual Report