Dominion Power 2000 Annual Report Download - page 40

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
During 2000, Dominion received a Notice of Violation from the
EPA alleging that it failed to obtain New Source Review permits
under the Clean Air Act prior to undertaking specified construction
projects at the Mt. Storm Power Station in West Virginia. Manage-
ment believes that Dominion has obtained the permits necessary in
connection with its generating facilities. Dominion has reached an
agreement in principle with the federal government and the state of
New York concerning the implementation of certain additional envi-
ronmental controls at its coal-fired generating stations in
connection with the resolution of various Clean Air Act matters.
The agreement in principle includes payment of a $5 million civil
penalty, a commitment of $14 million for environmental projects in
Virginia, West Virginia, Connecticut, New Jersey and New York,
and a 12-year, $1.2 billion capital investment program for environ-
mental improvements at Dominion’s coal-fired generating stations
in Virginia and West Virginia. Dominion had already committed to a
substantial portion of the $1.2 billion expenditures for SO2and NOX
emissions controls as discussed above. Although Dominion has
reached an agreement in principle, the terms of a final binding set-
tlement are still under negotiation. See Note 22 to the Consolidated
Financial Statements.
Global Climate Change
In 1993, the United Nation’s Global Warming Treaty became effec-
tive. The objective of the treaty is the stabilization of greenhouse
gas concentrations at a level that would prevent man-made emis-
sions from interfering with the climate system.
As a continuation of the effort to limit man-made greenhouse
emissions, an international Protocol was formulated in December
1997 in Kyoto, Japan. This Protocol calls for the United States to
reduce greenhouse emissions by 7 percent from 1990 baseline
levels by the period 2008-2012. The Protocol has been signed by
the United States but will not constitute a binding commitment
unless submitted to and approved by the United States Senate.
Emission reductions of the magnitude included in the Protocol, if
adopted, would likely result in a substantial financial impact on
companies that consume or produce fossil fuel-derived electric
power, including Dominion.
Recently Issued Accounting Standards
In June 2000, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No.
138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities, which amends SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133
requires that all derivative instruments be recorded on the Com-
pany’s balance sheet at their fair value effective January 1, 2001.
Dominion has determined that certain contracts used in its oper-
ations will be subject to fair value accounting under SFAS No. 133.
A substantial portion of these contracts is used by Dominion in its
production and delivery of energy to its customers and the con-
tracts involve various hedging strategies. In addition to these com-
modity contracts, Dominion uses interest rate swaps to manage its
cost of capital.
The Company will record one-time, non-operating after-tax
charges to net income of approximately $1 million and other com-
prehensive income of approximately $180 million in the first quarter
of 2001 for the initial adoption of SFAS No. 133. These adjustments
will be recognized as of January 1, 2001 as the cumulative effect of
a change in accounting principle. The ongoing effects will depend
on future market conditions, the Company’s hedging activities, and
further interpretations of the standard. The Derivatives Implemen-
tation Group (DIG), a group sponsored by the FASB, continues to
develop interpretive guidance. The DIG has not yet resolved certain
issues that could ultimately impact the application of the standard.
Restructuring and Other Acquisition-Related Charges
Subsequent to its acquisition of CNG, Dominion developed and
began the implementation of a plan to restructure the operations of
the combined companies. Restructuring activities include workforce
reductions and the consolidation of post-merger operations and
information technology systems. For the year ended December 31,
2000, the Company recognized $460 million of restructuring costs
and other acquisition-related costs. See Note 6 to the Consolidated
Financial Statements.
The 2000 workforce reductions and other restructuring actions
should reduce future annualized operating costs by approximately
$102 million that would otherwise have been incurred.
Business Opportunities and Other Operations
Because Dominion’s industry is rapidly changing, there are many
opportunities for acquisitions of assets and business combinations.
Dominion investigates any opportunity that may increase share-
holder value and build on existing businesses. Dominion has partic-
ipated in the past, and its security holders may assume that at any
time Dominion may be participating, in bidding or other negotiating
processes for such transactions. Such participation may or may not
result in a transaction for Dominion. However, any such transaction
that does take place may involve consideration in the form of cash,
debt or equity securities and may involve payment of a premium
over book or market values. Such transactions or payments could
affect the market prices and rates for Dominion’s securities.
Exploration and Production Operations
Dominion continues to focus on maintaining and increasing earnings
from oil and gas properties primarily through development and
acquisition activities and operating efficiencies. Dominion will con-
tinue to seek opportunities to optimize the value of its reserves
through the convergence of its gas and electric products and
maximization of its gas storage facilities. In addition, sharing past
experiences and sound business practices developed over time in
oil and gas operations should help improve operational efficiencies
and minimize finding, developing and lifting costs. Additional
efficiencies are being achieved by elimination of duplicate
administrative functions.