Dominion Power 2001 Annual Report Download

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Results in Uncertain Times
2001 Annual Report

Table of contents

  • Page 1
    Results in Uncertain Times 2001 Annual Report

  • Page 2
    Dominion Resources is one of the nation's leading natural gas and electric power companies. We're traded under the symbol "D" on the New York Stock Exchange and are proud to have the confidence of more than 350,000 shareholders. We're also privileged to serve nearly 4 million retail energy customers...

  • Page 3

  • Page 4
    ... I told you we'd target a 15 percent or better annual total return in 2001. We missed it. Assuming the economy, like the weather, returns to more normal conditions, we're targeting a 15 percent annual return on average going forward. 2 Thos. E. Capps Chairman, President and Chief Executive Officer

  • Page 5
    ... In our case, I call it results from hard work by a lot of good people. I credit our employees for the very flattering results of a survey published by Fortune Magazine as this letter went to press in early March. Fortune ranked Dominion as America's second most admired utility in its annual survey...

  • Page 6
    ... and cost to shareholders, rules like these pose as solutions while only compounding the problem. Even the rule makers have had to issue more than 170 interpretations to help clarify their intention. The Game Plan: Run A Sound Trading Business Some industry critics used Enron's downfall...

  • Page 7
    ... 2nd largest economy (based on GDP) * Infrared Satellite Photo New Company, New Earnings Profile Six Sigma Implementation $5.00 Louis Dreyfus Acquisition Millstone Acquisition Executive Loan Program CNG Acquisition Virginia Restructuring $3.00 10% Annual Average Growth $4.00 Operating Earnings Per...

  • Page 8
    6

  • Page 9
    ... 18,754 7 2000 2001 1999 Fuel Mix Purchases Nuclear 23.8% 15.3% Our first Midwest merchant generation facility, the Elwood Energy Center, is in its third year of service. Construction is nearing completion at our other merchant facilities in Ohio, Pennsylvania and West Virginia. Gas/Other 21...

  • Page 10
    ... is home to more than 60 percent of our total generating capacity and represents 41 percent of our revenues. We work to keep that base strong-an effort that has captured national attention among developers. For the third consecutive year, Dominion Virginia Power's economic development program earned...

  • Page 11
    ... Point North Anna Bath Bremo Clover Montgomery Hickman Person Gaston Roanoke Rapids Ladysmith Chesterfield Yorktown Surry Chesapeake Kincaid Pleasants Morgantown Mt. Storm Current Generation Portfolio Existing Generation Stations Coal Natural Gas Nuclear Hydro Oil/Gas Capacity at Plant December...

  • Page 12
    ... demand. Right now, we're on track to expand our existing capacity about 18 percent during the next three years, from 22,000 megawatts to 26,000 by 2005. Sites where construction or planning is underway are in Michigan, North Carolina, Tennessee, Ohio, Pennsylvania, Virginia and West Virginia. Some...

  • Page 13
    ...,694 1999 2000 2001 1999 2000 2001 Market Cap as of Dec. 31, 2001 $30.5 Natural Gas Trading & Sales 13% Compound Annual Growth Rate 1,429 1,150 $23.7 1,128 $15.9 Billions of Dollars $8.7 Billion Cubic Feet Dynegy Dominion El Paso Duke 1999 2000 2001 In 2001, Richmond City Council...

  • Page 14
    ... Pennsylvania where we've already broken ground. If the market holds or strengthens, we'll maintain or accelerate construction. Natural gas is America's fuel of choice, with an increasingly important role to play in future power generation. The dominance of natural gas means that the price of power...

  • Page 15
    ..., overreliance on any one fuel is risky business. When gas prices go up, as we saw last year, a generation fleet that depends too heavily on natural gas lacks balance and flexibility. Your company has a diverse energy fleet, with 24 percent of our capacity from nuclear power, 29 percent from coal...

  • Page 16
    ...users' group recognized our Kincaid Power Station in Illinois as the "2001 Power Station of the Year." Employees at our fossil-fuel and hydroelectric facilities have a long track record of operating and maintaining Dominion's fleet above industry standards. Nuclear Operating Excellence 14 For nine...

  • Page 17
    ... Sigma Now In Place A critical advantage in the increasingly competitive energy marketplace is our ability to generate energy at low cost. Dominion Energy's North Anna Station has often been rated as the nation's most efficient producer. Dominion Virginia Power's lineman, Ray Hooper, connects a new...

  • Page 18
    ... have gone from discovery to production in about three years-one of the fastest cycle times ever for a deepwater floating production platform. Devils Tower will become a hub equipped to handle oil and natural gas from other wells in the area, making the economics of the project even more attractive.

  • Page 19
    17

  • Page 20
    ... 10 times their annual salaries to purchase shares and must hold this stock over a five-year period. In fact, I am your company's largest individual shareholder. By any standard, in any industry, it's a unique level of employee ownership, and it's a good thing. I think the sad case of employees who...

  • Page 21
    ... on two unwavering conditions: first, that we maintain strong investment grade ratings; and second, that we balance our equity and debt in a proportion that serves the joint interests of our shareholders and lenders, and maintains the confidence of both. Visit your company's Web site at www.dom...

  • Page 22
    ... by acting as responsible citizens in our communities. The slowing economy hurts our low-income customers most. In Ohio, we helped customers who have been disconnected or received a shut-off notice. Under a one-time payment matching program, Dominion East Ohio matched up to $500 per customer on...

  • Page 23
    ...in West Virginia and Texas. Whether it's supporting youth programs, such as the Boy Scouts, sponsoring a golf tournament to benefit a children's charity, or funding an engineering endowment at a major university, active participation in community life is an integral part of our corporate citizenship...

  • Page 24
    ... at our coal stations in Virginia and West Virginia. The money- most of it already budgeted -would be spent over a 12-year period. Our people also worked with state agencies and landowners to improve the habitat for quail and other game birds along electric transmission rights-of-way. If you're...

  • Page 25
    ... A similar project is underway near our Mt. Storm Power Station in West Virginia. Last year, company volunteers from Texas to Connecticut joined forces to refurbish park trails, plant trees at inner city schools and upgrade an environmental education center. These all succeeded through the hard work...

  • Page 26
    ...Contents 25 31 50 51 Consolidated Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Selected Consolidated Financial Data Notes to Consolidated Financial Statements Report of Management's Responsibilities Independent Auditors' Report 24 86 86

  • Page 27
    ...gas, net Liquids, pipeline capacity and other purchases Restructuring and other acquisition-related costs Other operations and maintenance Depreciation, depletion and amortization Other taxes Total Income from operations Other income Interest and related charges Interest expense Subsidiary preferred...

  • Page 28
    ... from affiliates Inventories: Materials and supplies (average cost method) Fossil fuel (average cost method) Gas stored-current portion (LIFO) Derivative and energy trading assets Unrecovered gas costs Investment securities-trading Margin deposit assets Prepayments Other Total Investments $ 486...

  • Page 29
    ...and Shareholders' Equity At December 31, (millions) Current Liabilities 2001 2000 Securities due within one year Short-term debt Accounts payable, trade Accrued interest Accrued payroll Accrued taxes Derivative and energy trading liabilities Other Total Long-Term Debt $ 1,354 1,859 1,776 240 180...

  • Page 30
    ... and other adjustments Balance at December 31, 1999 Issuance of stock-CNG acquisition Issuance of stock-public offering Issuance of stock-employee, executive loan and direct stock purchase plans Stock repurchase and retirement Premium income equity securities Stock awards and stock options exercised...

  • Page 31
    ...Tax Amount 2001 Net income Other comprehensive income: Net deferred gains on derivatives-hedging activities Unrealized gains on investment securities Foreign currency translation adjustments Minimum pension liability adjustment Cumulative effect of a change in accounting principle Amounts reclassi...

  • Page 32
    ... trading assets and liabilities Other Net cash from operating activities Cash ï¬,ows from (used in) investing activities Plant construction and other property additions Gas and oil properties and equipment Loan originations Repayment of loan originations Proceeds from sale of businesses Acquisition...

  • Page 33
    ..., Under the Virginia Utility Restructuring Act, Dominion's electric base rates (excluding fuel costs and certain other allowable adjustments) remain unchanged until July 2007 unless modified consistent with that Act. The capped rates and wires charges that, where applicable, will be assessed...

  • Page 34
    ..., the generation portion of Dominion's electric utility operations in Virginia is open to competition and is no longer subject to cost-based rate regulation. As a result there will be increased pressure to lower costs, including the cost of purchased electricity. Because Dominion's electric utility...

  • Page 35
    ... in prices of natural gas and oil. Dominion E&P manages commodity risk through the use of derivative contracts such as forwards, swaps, and options. In addition, Dominion also reports the financial services operations of Dominion Capital, Inc. (DCI) and Dominion's corporate operations as operating...

  • Page 36
    ...compared to 2000. Dominion acquired Millstone Power Station (Millstone) on March 31, 2001 and its operations contributed largely to the increase in nonregulated electric sales. Regulated electric sales also increased, reï¬,ecting comparatively higher fuel recovery rates and continued customer growth...

  • Page 37
    .... Dominion's effective income tax rate increased in 2001 due to its utility operations in Virginia becoming subject to state income taxes in lieu of gross receipts taxes, higher effective rates associated with foreign earnings and higher pretax income in relation to nonconventional fuel tax credits...

  • Page 38
    ...higher costs for fossil fuels consumed and energy purchases. Selected Information - Energy Trading Activities Operating expenses increased $810 million to $4.7 billion for 2001 as compared to 2000. Higher commodity prices contributed to increased electric fuel and energy purchases and purchased gas...

  • Page 39
    ...growth and comparatively higher fuel rates partially offset by the comparatively milder weather. Operating Expenses Unrealized gains and losses in Dominion's portfolio of energy trading contracts at December 31, 2001 are summarized in the following table based on the approach used to determine fair...

  • Page 40
    ... electric sales increased as a result of customer growth, higher fuel rates, and a charge in 1999 for rate refunds. Weather did not result in material changes in regulated electric sales for the comparable periods. However, colder weather in Dominion's gas distribution service territories resulted...

  • Page 41
    ... in payables, a decrease in cash ï¬,ow from financial services operations due to the exiting of DCI's core businesses, and an increase in inventory purchases. At December 31, 2000, receivables resulting from gas sales, marketing and trading activities, as well as unrecovered gas costs, were...

  • Page 42
    ...," if applicable, such as major acquisitions. Credit ratings for the Dominion Companies as of March 1, 2002 follow: Standard & Poor's Moody's 40 Dominion Resources, Inc. Senior unsecured debt securities BBB+ Preferred securities of subsidiary trusts BBBCommercial paper A-2 Virginia Power Mortgage...

  • Page 43
    ... Virginia Power used the remaining proceeds for general corporate purposes and to repay other debt. 2001 - DCI Financing Activities In 2001, Dominion received proceeds of $245 million from the issuance of common stock through Dominion Direct (a dividend reinvestment and open enrollment direct stock...

  • Page 44
    ... of generation facilities, environmental upgrades, construction improvements of gas and electric transmission and distribution assets, purchases of nuclear fuel and expenditures to develop natural gas and oil properties. Dominion expects to fund its capital expenditures with cash from operations...

  • Page 45
    ...to Dominion. Dominion used the proceeds to repay commercial paper. At December 31, 2001, Dominion owed $367 million under these loans and reported it as notes payable -affiliates on the 2001 Consolidated Balance Sheet. The DFV Senior Notes are secured by DTI stock and in part by certain rights with...

  • Page 46
    ... their plans to separate generation from transmission and distribution operations. Dominion's proposed separation plan included transferring the generation assets and operations, including its non-utility power purchase contracts, from its regulated electric utility, Virginia Power, to a separate af...

  • Page 47
    ... electric utility subsidiary filed for FERC approval of a tariff to sell wholesale power at capped rates based on its embedded cost of generation. This cost-based sales tariff could be used to sell to loads within or outside its service territory. Any such sales would be voluntary. Dominion expects...

  • Page 48
    ... pooling services; these services are one of the tools that natural gas suppliers may utilize to provide retail customer choice in the future. Rate Matters - Gas Distribution parties, regarding the costs of gas supplies and increased operating costs, that stipulated that Dominion would receive...

  • Page 49
    ...undertaking specified construction projects at the Mt. Storm Power Station in West Virginia. The Attorney General of New York filed a suit against Virginia Power alleging similar violations of the Clean Air Act at the Mt. Storm Power Station. Virginia Power also received notices from the Attorneys...

  • Page 50
    ... is home to Dominion's Kincaid and Elwood generating facilities. The target region extends east to Virginia Power's service territory and north to New England, where Dominion operates Millstone. Dominion is benefiting from the CNG acquisition, as it is developing natural gas-fired power generation...

  • Page 51
    ...as described below. Interest rate risk generally is related to Dominion's outstanding debt and financial services activities. Commodity price risk is present in Dominion's electric operations, gas production and procurement operations, and energy marketing and trading operations due to the exposure...

  • Page 52
    ... at the corporate level to monitor compliance with the price risk management policies of all subsidiaries. Dominion maintains credit policies that include the evaluation of a prospective counterparty's financial condition, collateral requirements where deemed necessary, and the use of standardized...

  • Page 53
    ...fied to conform to the 2001 presentation. Use of Fair Value Measurements Dominion reports certain contracts and instruments at fair value in accordance with applicable generally accepted accounting principles. Fair value is based on actively quoted market prices, if available. In the absence...

  • Page 54
    ... effects of Enron's bankruptcy on Dominion's December 31, 2001 consolidated financial statements. Operating Revenue Nonregulated electric sales consist primarily of sales of electricity from utility, independent power production and merchant nuclear plant resources at market-based rates, and net...

  • Page 55
    ... on a unit-of-production basis sufficient to fully amortize, over the estimated service life, the cost of the fuel plus permanent storage and disposal costs. In 2001, Dominion increased its estimate of the useful lives of its nuclear facilities by 20 years. This change in estimate was made in...

  • Page 56
    ... of Dominion's use of derivatives and energy trading contracts, including its risk management policy, its accounting Methods of allocating costs to accounting periods for operations subject to federal or state cost-of-service rate regulation may differ from accounting methods generally applied...

  • Page 57
    ... electric and gas utility property. Dominion has not yet determined the financial impact of adopting the new standard. Also, under the new standard, the realized and unrealized earnings of external trusts available for funding decommissioning activities at Dominion's utility nuclear plants will be...

  • Page 58
    ... for plant assets and $105 million for nuclear fuel. Dominion recorded $302 million of goodwill representing the excess of the purchase price over amounts allocated to Millstone's assets acquired and liabilities assumed. Through December 31, 2001, Dominion amortized $6 million of goodwill based on...

  • Page 59
    ... operations subject to cost-of-service rate regulation. Through December 31, 2001, Dominion amortized $165 million of goodwill based on the straight-line method and 40 years. See Note 4. The initial purchase price allocation included estimated values for amounts expected to be realized from the sale...

  • Page 60
    ... plan, Dominion identified approximately 340 salaried positions to be eliminated and recorded $42 million in employee severance-related costs. As of December 31, 2001, 12 positions had been eliminated. Severance payments were based on the individual's base salary and years of service at the time...

  • Page 61
    ... 11, 2001 events and the mortgage interest rate environment at that time. In light of recent actual credit loss experience and actual prepayment activity of certain mortgage and commercial loans in the securitization trusts, Dominion increased its credit loss and prepayment speed assumptions used to...

  • Page 62
    ... established a detailed plan to restructure the electric utility industry in Virginia. The legislation's deregulation of generation was an event that required discontinuation of SFAS No. 71 for Dominion's generation operations in 1999. Dominion's transmission and distribution operations continue to...

  • Page 63
    ... Dominion's effective income tax rate increased in 2001 due to its utility operations in Virginia becoming subject to state income taxes in lieu of gross receipts taxes, higher effective rates associated with foreign earnings and higher pretax income in relation to nonconventional fuel tax credits...

  • Page 64
    ... at the time of the 2001 securitization was based on expected cash ï¬,ow recoveries from the loan portfolios, assuming a credit loss rate of 2 percent, and a discount rate of 10 percent. The following table summarizes key information about the securitizations of commercial loans during 2001 and 2000...

  • Page 65
    ...% adverse change Impact on fair value of 20% adverse change Residual cash flows discount rate (annual) (1) Includes prepayment penalties. (2) Dominion sold all of its servicing rights as part of its sale of Saxon Mortgage in 2001. Impact on fair value of 10% adverse change Impact on fair value of...

  • Page 66
    ... in the Millstone nuclear decommissioning trusts. The cost of these securities was Dominion uses derivatives to manage the commodity and financial market risks of its business operations. Dominion manages the price risk associated with purchases and sales of electricity, natural gas and oil by...

  • Page 67
    ... cash ï¬,ow hedges of the variable price risk associated with the purchase and sale of electricity, natural gas, oil and other commodities. Dominion also uses cash ï¬,ow hedge strategies to hedge the variability in foreign exchange rates and variable interest rates on long-term debt. In its...

  • Page 68
    ... initiated primarily for purposes of hedging anticipated purchases and sales of natural gas and for use in its energy trading operations. As a result of Enron's bankruptcy filing, Dominion reexamined the estimated collectibility of its net accounts receivable balance from Enron and the valuation of...

  • Page 69
    ... Nuclear Operations Dominion has a total of seven licensed nuclear reactors at its Surry and North Anna plants in Virginia and its Millstone plant in Connecticut. Surry and North Anna serve native load in Dominion's regulated electric utility operations. Millstone is a nonregulated merchant plant...

  • Page 70
    ... public liability of an owner of a nuclear power plant to $9.5 billion for a single nuclear incident. The Price-Anderson Act Amendment of 1988 allows for an inï¬,ationary provision adjustment every five years. Dominion has purchased $200 million of coverage from commercial insurance pools with the...

  • Page 71
    ... rates for capitalized costs under the full cost method of accounting for Dominion's United States and Canadian cost centers were as follows: (Per Mcf Equivalent) Year ended December 31, 2001 2000 1999 Utility Production Transmission Distribution Storage Plant under construction Nuclear fuel...

  • Page 72
    ... customers' fuel rates. (4) In 2001 the Public Utilities Commission of Ohio authorized the deferral of costs associated with certain uncollectible customer accounts not contemplated by current rates. Dominion expects recovery of such costs, which will be included in Dominion's next base rate case...

  • Page 73
    ..., including Virginia Power, from declaring or paying a dividend to an affiliate, if found not to be in the public interest. At December 31, 2001, the Virginia Commission had not restricted the payment of dividends by Virginia Power. Certain agreements associated with Dominion's credit facilities...

  • Page 74
    ...an auction process. The combined weighted average rates for all series outstanding during 2001, 2000, and 1999, including fees for broker/dealer agreements, were 4.32 percent, 5.71 percent and 4.82 percent, respectively. 72 Dominion is authorized to issue up to 20 million shares of preferred stock...

  • Page 75
    ... years (all periods); risk free interest rate of 5.15 percent, 5.18 percent, 6.52 percent; and expected lives of six years (all periods). In the fourth quarter of 2001, Dominion modified the stock options of certain executives in connection with the restructuring activities discussed in Note 7. The...

  • Page 76
    ... retiree health care and life insurance benefits with annual premiums based on several factors such as age, retirement date, and years of service. In 2000, Dominion offered an early retirement program (ERP). The ERP provided up to three additional years of age and three additional years of employee...

  • Page 77
    ...251) - (251) - - $(251) Dominion has nonqualified pension and supplemental pension plans which do not have ''plan assets'' as defined by generally accepted accounting principles. The total projected benefit obligation for these plans was $103 million and $93 million at December 31, 2001 and 2000...

  • Page 78
    ... health care cost trend rates would have the following effects: Other Postretirement Benefits (millions) One percentage point increase One percentage point decrease Dominion's retail gas distribution companies are subject to price regulation in the states of Ohio, Pennsylvania and West Virginia...

  • Page 79
    ...'s potential exposure under its long-term power purchase commitments. Fuel Purchase Commitments Dominion enters into long-term purchase commitments for fuel used in electric generation and natural gas for purposes other than trading. Estimated payments under these commitments for the next five...

  • Page 80
    ...undertaking specified construction projects at the Mt. Storm Power Station in West Virginia. The Attorney General of New York filed a suit against Virginia Power alleging similar violations of the Clean Air Act at the Mt. Storm Power Station. Virginia Power also received notices from the Attorneys...

  • Page 81
    Jersey and New York, and a 12-year, $1.2 billion capital investment program for environmental improvements at Virginia Power'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 sulfur dioxide ...

  • Page 82
    ... generating units and power purchase agreements. It also manages Dominion's generation growth strategy; energy trading, marketing, hedging and arbitrage activities; and gas pipeline and certain gas production and storage operations. Dominion Delivery manages Dominion's electric and gas distribution...

  • Page 83
    ... information pertaining to Dominion's operations: (millions, except total assets) 2001 Dominion Energy Dominion Delivery Dominion E&P Dominion Capital Corporate and Other Eliminations Consolidated Total Revenue from external customers: Regulated electric sales Regulated gas sales Nonregulated...

  • Page 84
    ... with international operations. Long-lived assets at December 31, 1999 included Dominion's investments in Latin America and in the U.K., which were divested in 2000. Note 31 Gas and Oil Producing Activities (unaudited) Capitalized Costs The aggregate amounts of costs capitalized for gas and oil...

  • Page 85
    ...2001, and changes in the reserves during those years, are shown in the two schedules which follow. 2001 (billion cubic feet) Proved developed and undeveloped reserves - Gas... estimates Production Purchases of gas in place Sales of gas in place At December 31 Proved developed reserves - Gas 2,337 1,...

  • Page 86
    ... Dominion's proved reserves. Dominion cautions that the disclosures shown are based on estimates of proved reserve quantities and future production schedules which are inherently imprecise and subject to revision, and the 10% discount rate is arbitrary. In addition, present costs and prices are used...

  • Page 87
    ... of weather conditions, changes in rates and other factors. Amounts for 2000 reï¬,ect certain reclassifications to conform to the 2001 presentation. (millions, except per share amounts) 2001 First Qtr. Second Qtr. Third Qtr. Fourth Qtr. Total Operating revenue Income from operations Net income...

  • Page 88
    ... generally accepted accounting principles. Other financial information in the annual report is consistent with that in the Consolidated Financial Statements. Management maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that Dominion...

  • Page 89
    ...and Executive Director, The Cleveland Foundation (community foundation), Cleveland, Ohio Kenneth A. Randall, 74 Corporate director of various companies, Williamsburg, Virginia Frank S. Royal, M.D., 62 Physician, Richmond, Virginia S. Dallas Simmons, 62 Chairman, President and Chief Executive Officer...

  • Page 90
    ... on the Web site. Keyword/Search: Annual Report Independent Auditors Deloitte & Touche LLP Richmond, Virginia Shareholder Inquiries You may buy Dominion common stock directly from the company through Dominion Direct with no brokerage fees. Please contact Shareholder Services for information on how...

  • Page 91
    Dominion • 2001 Annual Report Dominion Resources, Inc. P.O. Box 26532 Richmond, Virginia 23261-6532 www.dom.com