Dominion Power 2007 Annual Report Download - page 41

reflecting the effects of milder weather on demand, partially
offset by an increase in purchased power volumes; and
‰A $104 million decrease from our merchant generation busi-
ness, due primarily to lower commodity prices and decreased
consumption of fossil fuel, reflecting the effects of milder
weather on demand, partially offset by higher replacement
power costs incurred due to an increase in scheduled outage
days.
Purchased gas expense decreased 25% to $2.9 billion, princi-
pally resulting from:
‰An $815 million decrease associated with our producer serv-
ices business, due to lower volumes and prices;
‰A $192 million decrease related to gas distribution operations,
due to a $252 million decrease associated with milder weather
and the migration of additional customers to Energy Choice
and a $222 million decrease due to lower average gas prices,
partially offset by a $282 million increase related to the recov-
ery of gas costs;
‰A $120 million decrease related to E&P operations, as the
result of lower volumes and the impact of netting sales and
purchases of gas under buy/sell arrangements following the
implementation of EITF 04-13, as discussed in Operating
Revenue; partially offset by
‰A $139 million increase associated with retail energy market-
ing operations, primarily due to increased volumes.
Other energy-related commodity purchases expense decreased 27%
to $1.0 billion, primarily attributable to the following factors, all
of which are discussed in Operating Revenue:
‰A $237 million decrease in the cost of coal purchased for
resale; and
‰A $175 million decrease in emissions allowances purchased
for resale; partially offset by
‰A $47 million increase related to purchases of oil by E&P
operations, reflecting higher market prices ($63 million),
partially offset by lower volumes ($16 million) of oil pur-
chases under buy/sell arrangements.
Other operations and maintenance expense increased 7% to $3.2
billion, resulting from:
‰A $235 million increase primarily related to hedging activities
associated with our generation assets. The effect of this
increase is offset by a corresponding increase in Operating
Revenue;
‰A $166 million charge from the write-off of certain regulatory
assets related to the planned sale of Peoples and Hope;
‰A $97 million increase resulting primarily from higher sal-
aries, wages and benefits expenses;
‰A $93 million increase attributable to higher production
handling, transportation and operating costs related to E&P
operations;
‰$91 million of impairment charges related to DCI invest-
ments;
‰A $79 million increase resulting from Kewaunee, which was
acquired in July 2005;
‰A $65 million decrease in gains from the sale of emissions
allowances held for consumption;
‰A $60 million charge to eliminate the application of hedge
accounting for certain interest rate swaps associated with our
junior subordinated notes payable to affiliated trusts that sold
trust preferred securities;
‰A $41 million reduction in proceeds related to FTRs granted
by PJM to our utility generation operations. These FTRs are
used to offset congestion costs associated with PJM spot
market activity, which are included in Electric fuel and energy
purchases expense;
‰A $35 million increase in generation-related outage costs
primarily due to an increase in the number of scheduled out-
ages;
‰A $29 million increase related to major storm damage and
service restoration costs associated with our distribution oper-
ations, including costs resulting from tropical storm Ernesto
in September 2006;
‰A $27 million charge resulting from the cancellation of a pipe-
line project.
These increases were partially offset by:
‰A $96 million decrease in hedge ineffectiveness expense asso-
ciated with our E&P operations, primarily due to a decrease
in the fair value differential between the delivery location and
commodity specifications of derivative contracts held by us as
compared to our forecasted gas and oil sales and the increased
use of basis swaps;
‰A $62 million benefit resulting from favorable changes in the
fair value of certain gas and oil derivatives that were
de-designated as hedges following the 2005 hurricanes;
‰A benefit resulting from the absence of the following items
recognized in 2005:
‰A $423 million loss related to the discontinuance of hedge
accounting for certain gas and oil derivatives resulting
from an interruption of gas and oil production in the Gulf
of Mexico caused by the 2005 hurricanes;
‰A $77 million charge resulting from the termination of a
long-term power purchase agreement;
‰A $59 million loss related to the discontinuance of hedge
accounting for certain oil derivatives primarily resulting
from a delay in reaching anticipated production levels in
the Gulf of Mexico, and subsequent changes in the fair
value of those derivatives; and
‰A $51 million charge related to credit exposure associated
with the bankruptcy of Calpine Corporation; partially
offset by
‰A $24 million net benefit resulting from the establishment
of certain regulatory assets and liabilities in connection
with the settlement of a North Carolina rate case in the
first quarter of 2005.
Depreciation, depletion and amortization expense increased 15%
to $1.6 billion, largely due to the impact of increased gas and oil
production, as well as higher E&P finding and development costs.
Interest expense increased 9% to $1.0 billion principally
reflecting the impact of additional borrowings and higher interest
rates on variable rate debt.
Loss from discontinued operations was $150 million as compared
to income from discontinued operations of $6 million in 2005,
primarily due to a $164 million charge related to the Peaker
facilities, whose operations were reclassified to discontinued oper-
ations in December 2006.
Dominion 2007 Annual Report 39