Dominion Power 2001 Annual Report Download - page 34

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Electric Industry is Increasingly Subject to Competition
Effective January 1, 2002, 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 busi-
ness has not previously operated in a competitive environment,
the extent and timing of entry by additional competitors into
the electric market in Virginia is yet unknown. Therefore, it is
difficult to predict the extent to which Dominion will be able to
operate profitably within this new environment. In addition,
the success of Dominion’s power merchant plants is dependent
upon Dominion’s ability to find buyers willing to enter into
power purchase agreements at prices sufficient to cover
operating costs.
There Are Inherent Risks in the Operation of Nuclear Facilities
Dominion operates nuclear facilities that are subject to inherent
risks. These include the ability to dispose of spent nuclear fuel,
the ability to maintain adequate reserves for decommissioning
and potential liabilities arising out of the operation of these
facilities. Dominion maintains decommissioning trusts and
external insurance coverage to minimize the financial exposure
to these risks. However, it is possible that damages could exceed
the amount of Dominion’s insurance coverage. In addition, in
today’s environment there is a heightened risk of a terrorist
attack on the nation’s nuclear plants. Dominion expects to incur
increased security costs at its nuclear facilities.
The Use of Derivative Contracts Could Result in Financial Losses
Dominion uses derivatives including futures, forwards, options
and swaps, to manage its commodity and financial market risks.
In addition, Dominion purchases and sells commodity-based
contracts in the natural gas, electricity and oil markets for
trading purposes. In the future, Dominion could recognize
financial losses on these contracts as a result of volatility in the
market values of the underlying commodities or if a counter-
party fails to perform under a contract. In the absence of actively
quoted market prices and pricing information from external
sources, the valuation of these financial instruments can involve
management’s judgment or use of estimates. As a result, changes
in the underlying assumptions or use of alternative valuation
methods could affect the value of the reported fair value of these
contracts. For additional information concerning Dominion’s
derivatives and commodity-based trading contracts, see Market
Rate Sensitive Instruments and Risk Management of MD&A and
Notes 2 and 15 to the Consolidated Financial Statements.
Dominion’s Telecommunication Business Strategy’s Success Is
Dependent Upon Market Conditions
The current strategy of Dominion’s joint venture in the telecom-
munication’s business is based upon its ability to deliver lit capac-
ity, dark fiber and colocation services to its customers. The
market for these services, like the telecommunications industry
in general, is rapidly changing. Dominion cannot assure that
growth in demand for these services will occur as expected.
If the market for these services fails to grow as quickly as
anticipated or becomes saturated with competitors, including
competitors using alternative technologies such as wireless,
Dominion’s investment in the telecommunication business may
be adversely affected.
Dominion’s Exploration and Production Business Is Dependent on
Factors Including Commodity Prices Which Cannot Be Predicted
Or Controlled
These factors include: price fluctuations in natural gas and crude
oil prices; results of future drilling activity; Dominion’s ability to
identify and locate prospective geological structures and to drill
and successfully complete wells in those structures; Dominion’s
ability to expand its leased land positions in desirable areas,
which are often subject to competition; and other risks incident
to the operations of natural gas and oil wells. In addition,
Dominion follows the full cost method of accounting for gas
and oil exploration and production activities prescribed by the
Securities and Exchange Commission (SEC). Under the full cost
method, all direct costs of property acquisition, exploration and
development activities are capitalized. The principal limitation
is that these capitalized amounts may not exceed the present
value of estimated future net revenues from the production of
proved gas and oil reserves (the ceiling test). If net capitalized
costs exceed the ceiling test at the end of any quarterly period,
then a permanent write-down of the assets must be recognized
in that period.
An Inability to Access Financial Markets Could Affect the Execution
of Dominion’s Business Plan
Dominion relies on access to both short-term money markets
and longer-term capital markets as a significant source of liquid-
ity for capital requirements not satisfied by the cash flow of
its operations. Management believes that Dominion and its
subsidiaries will maintain sufficient access to these financial
markets based upon current credit ratings. However, certain
disruptions outside of Dominion’s control may increase the cost
of borrowing to Dominion or restrict its ability to access one or
more financial markets. Such disruptions could include an
economic downturn or the bankruptcy of an unrelated energy
company. Restrictions on Dominion’s ability to access financial
markets may affect Dominion’s ability to execute its business
plan as scheduled.
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