Dominion Power 2001 Annual Report Download - page 35

Operating Segments
In general, management’s discussion of Dominion’s results
of operations focuses on the contributions of its operating
segments. However, the discussion of Dominion’s financial con-
dition under Liquidity and Capital Resources is based on legal
entities. Dominion’s three primary operating segments are:
Dominion Energy manages Dominion’s generation portfo-
lio, consisting primarily of generating units and power purchase
agreements. It also manages Dominion’s generation growth strat-
egy; energy trading, marketing, hedging and arbitrage activities;
and gas pipeline and certain gas production and storage opera-
tions. Dominion Energy’s operating results largely reflect: the
impact of weather on demand for electricity; customer growth
as influenced by overall economic conditions and acquisitions;
and changes in prices of commodities, primarily electricity and
natural gas, that the segment actively markets and trades, uses
for hedging purposes, and consumes in generation activities.
Dominion Delivery manages Dominion’s electric and gas
distribution systems, as well as customer service and electric
transmission. Dominion Delivery’s operating results reflect the
impact of weather on demand for electricity and natural gas and
customer growth as influenced by overall economic conditions.
The businesses of Dominion Delivery are subject to cost-of-
service rate regulation and changes in prices of commodities
consumed or delivered are generally recoverable in rates charged
to customers. However, these rates may be subject to price caps,
limiting recovery of higher costs in certain circumstances.
Dominion Exploration & Production manages
Dominion’s onshore and offshore gas and oil exploration, devel-
opment and production operations. Operations are located on
the outer continental shelf and deep water areas of the Gulf of
Mexico and in selected regions in the lower 48 states and
Canada. Dominion E&P’s operating results reflect successful
discovery of and production from natural gas and oil reserves
and changes 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 segments. Dominion has sub-
stantially completed its exit of the core operating businesses of
DCI, as required by the SEC under the Public Utility Holding
Company Act of 1935 (1935 Act). DCI’s primary business was
financial services, including loan administration, commercial
lending and residential mortgage lending. Corporate and other
includes those costs of Dominion’s corporate operations and
certain other charges not allocated to Dominion’s other operat-
ing segments.
For more information on Dominion’s operating segments,
see Note 30 to the Consolidated Financial Statements.
Critical Accounting Policies
Dominion has identified the following accounting policies that,
as a result of the judgments, uncertainties, uniqueness and com-
plexities of the underlying accounting standards and operations
involved, could result in material changes to its financial condi-
tion or results of operations under different conditions or using
different assumptions.
Accounting for risk management and energy trading
contracts at fair value — Dominion uses derivatives 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.
The accounting requirements for derivatives and hedging activi-
ties are complex and interpretation of these requirements by
standard-setting bodies is ongoing. All derivatives, other than
specific exceptions, are reported on the Consolidated Balance
Sheet at fair value, beginning in 2001. Energy trading contracts
are also reported on the Consolidated Balance Sheets at fair
value. Changes in fair value, except those related to derivative
instruments designated as cash flow hedges, are generally
included in the determination of Dominion’s net income at each
financial reporting date until the contracts are ultimately settled.
The measurement of fair value is based on actively quoted mar-
ket prices, if available. In the absence of actively quoted market
prices, Dominion seeks indicative price information from exter-
nal sources, including broker quotes and industry publications.
If pricing information from external sources is not available,
measurement involves judgment and estimates. These estimates
are based on valuation methodologies deemed appropriate by
Dominion management. For individual contracts, the use of
different assumptions could have a material effect on the con-
tract’s estimated fair value. In addition, for hedges of forecasted
transactions, Dominion must estimate the expected future cash
flows of forecasted transactions, as well as evaluate the probabil-
ity of occurrence and timing of such transactions. Changes in
conditions or the occurrence of unforeseen events could affect
the timing of recognition of changes in fair value of certain
hedging derivatives. See Selected Information —Energy Trading
Activities and Market Rate Sensitive Instruments and Risk Man-
agement in MD&A and Notes 2, 15, and 28 to the Consolidated
Financial Statements.
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