Dominion Power 2000 Annual Report Download - page 41

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Due to unprecedented supply and demand factors, natural gas
prices are now at levels not seen in years. While increased prices
can benefit Dominion, where over 80 percent of reserves are nat-
ural gas, higher prices also will impact the future cost of acquiring,
finding, developing and producing reserves. Higher oil and gas
prices have impacted both the availability and cost of oilfield equip-
ment and materials, such as rigs, boats and drill pipe.
Independent Power Production Operations
Dominion’s future focus in its power generation business is to
acquire and develop additional power generation in the MAIN to
Maine region. The region begins at the Mid-America Intercon-
nected Network (MAIN) and extends northeastward through
Maine. MAIN includes electric service territories of the upper Mid-
west. Dominion is benefiting from the CNG acquisition as it plans
to develop natural gas-fired power generation facilities along its
natural gas pipeline system. Dominion has identified a number of
potential development sites in Ohio, Pennsylvania, New York, West
Virginia and Virginia.
Telecommunications Operations
The Company plans to expand its telecommunications operations
as a competitive provider of telecommunications service, including
the development of a facilities-based high-bandwidth capacity
telecommunications network throughout the eastern United States.
Initially, Dominion will build its network through the acquisition of
dark fiber capacity on existing third-party networks. It expects
future growth of its network to occur through joint development
projects on third-party rights of way. The Company anticipates
financing these expansion plans through a financing structure that
will allow Dominion to deconsolidate its telecommunications busi-
ness, while maintaining management flexibility for future growth.
Dominion expects to close the approximately $700 million financing
plan in early 2001 and will use the proceeds to fund telecommuni-
cations expansion.
Divestitures
Under the SEC’s order approving the CNG acquisition, Dominion
must divest itself of DCI within three years. No formal plan of
divestiture has been adopted. However, Dominion has sold
certain portions of its financial services businesses. Until DCI is
sold, Dominion will continue to operate these financial service
activities and be subject to their risks.
Restructuring of Contracts with Non-Utility
Generating Facilities
The Company has reached an agreement, pending regulatory
approvals, to terminate three long-term power purchase agree-
ments. Dominion expects the transaction to be completed in the
first quarter of 2001, resulting in a one-time, non-operating charge
of approximately $135 million, after taxes. The transaction is part of
an ongoing program which seeks to achieve competitive cost struc-
tures at its power generating business.
Nuclear Relicensing
In June 2001, Dominion plans to file applications with the NRC to
renew the operating licenses for its Surry and North Anna nuclear
stations. The technical work required to support a license renewal
application was completed in 2000. The renewal of the license will
extend the plants’ useful lives by 20 years. See Note 14 to the Con-
solidated Financial Statements.
Effect of Changes in Natural Gas and Oil Prices
Dominion’s operations are impacted by changes in energy commod-
ity prices. To the extent energy commodities are sold by one of
Dominion’s cost-of-service rate regulated utilities, the cost of such
commodities are generally recovered through rates. For sales of
Dominion’s production of natural gas and oil and for sales of energy
commodities through nonregulated subsidiaries, price changes
impact Dominion’s sales revenue. However, Dominion has estab-
lished an enterprise risk management function to manage such
price risk exposures.
Market Rate Sensitive Instruments and Risk Management
Dominion is exposed to market risk because it utilizes financial
instruments, derivative financial instruments and derivative
commodity instruments. The market risks inherent in these
instruments are represented by the potential loss due to adverse
changes in interest rates, commodity prices and equity security
prices as described below. Interest rate risk generally is related to
Dominion’s outstanding debt as well as its commercial, consumer,
and mortgage lending activities. Commodity price risk is experi-
enced in Dominion’s electric operations, gas production and pro-
curement operations, and energy marketing and trading operations
due to the exposure to market shifts for prices received and paid for
natural gas and electricity. Dominion uses derivative commodity
instruments to hedge price exposures for these operations.
Dominion is exposed to equity price risk through various portfolios
of equity securities.
Dominion uses the sensitivity analysis methodology to disclose
the quantitative information for interest rate and commodity price
risks. The sensitivity analysis estimates the potential loss of future
earnings or fair value from market risk sensitive instruments over a
selected time period due to a 10% unfavorable change in interest
rates and commodity prices.