Dominion Power 2001 Annual Report Download - page 52

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Interest Rate Risk
Dominion manages its interest rate risk exposure predominantly
by maintaining a balance of fixed and variable rate debt.
Dominion also enters into interest rate sensitive derivatives,
including interest rate swaps and interest rate lock agreements.
In addition, Dominion, through subsidiaries, retains ownership
of mortgage investments, including subordinated bonds and
interest-only residual assets retained at securitization of mort-
gage loans originated and purchased. For financial instruments
outstanding at December 31, 2001, a hypothetical 10 percent
increase in market interest rates would decrease annual earnings
by approximately $10 million. A hypothetical 10 percent
increase in market interest rates, as determined at December 31,
2000, would have resulted in a decrease in annual earnings of
approximately $40 million.
Foreign Exchange Risk
Dominion’s Canadian natural gas and oil exploration and pro-
duction activities are relatively self-contained within Canada. As
a result, Dominion’s exposure to foreign currency exchange risk
for these activities is limited primarily to the effects of transla-
tion adjustments that arise from including that operation in its
consolidated financial statements. Since these translation adjust-
ments do not impact cash flows, Dominion’s management moni-
tors this exposure but believes it is not material. Although
Dominion may purchase products and services denominated in
foreign currencies for use in its non-Canadian operations and
may use currency forward contracts to manage related risks,
such commitments were not material at December 31, 2001
and 2000.
Equity Price Risk
Dominion is subject to equity price risk due to marketable
equity securities held as investments and in trust funds. These
marketable securities are reported on the balance sheet at fair
value. The following table presents marketable equity securities
held by Dominion by category at December 31, 2001 and 2000.
2001 2000
Fair Fair
(millions) Cost Value Cost Value
Marketable securities $127 $121 $134 $118
Nuclear decommissioning
trust investments 734 952 279 549
Risk Management Policies
Dominion has operating procedures in place that are adminis-
tered by experienced management to help ensure that proper
internal controls are maintained. In addition, Dominion has
established an independent function 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 condi-
tion, collateral requirements where deemed necessary, and the
use of standardized agreements which facilitate the netting of
cash flows associated with a single counterparty. In addition,
Dominion also monitors the financial condition of existing
counterparties on an ongoing basis. Management believes, based
on Dominion’s credit policies and the December 31, 2001 provi-
sion for credit losses, that it is unlikely that a material adverse
effect on its financial position, results of operations or cash flows
would occur as a result of counterparty nonperformance. See
Note 15 to the Consolidated Financial Statements for discussion
of the effects of Enron’s bankruptcy on Dominion’s December
31, 2001 consolidated financial statements.
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SELECTED CONSOLIDATED FINANCIAL DATA
(millions, except per share amounts) 2001 2000 1999 1998 1997
Operating revenue $10,558 $ 9,246 $ 5,520 $ 6,081 $ 7,263
Income before extraordinary item and cumulative effect of a change
in accounting principle 544 415 552 548 412
Extraordinary item (net of income taxes of $197) —— (255) ——
Cumulative effect of a change in accounting principle
(net of income taxes of $11) — 21 ———
Net income 544 436 297 548 412
Earnings per common share—basic 2.17 1.85 1.55 2.81 2.22
Earnings per common share—diluted 2.15 1.85 1.48 2.81 2.22
Total assets 34,369 29,297 17,782 17,549 20,184
Long-term debt, subsidiary preferred stock subject to mandatory redemption
and preferred securities of subsidiary trusts 13,251 10,486 7,321 6,817 7,761
Dividends paid per share 2.58 2.58 2.58 2.58 2.58