Dominion Power 2002 Annual Report Download - page 35

reduction in Dominion’s credit ratings by either Standard
& Poor’s or Moody’s could increase its borrowing costs and
adversely affect operating results.
Potential Changes in Accounting Practices May Adversely
Affect Dominion’s Financial Results
Dominion cannot predict the impact of future changes in
accounting regulations or practices in general with respect to
public companies, the energy industry or its operations specifi-
cally. New accounting standards could be issued by the Finan-
cial Accounting Standards Board (FASB) or the SEC that
could change the way Dominion records revenues, expenses,
assets and liabilities. These changes in accounting standards
could adversely affect Dominion’s reported earnings or increase
its liabilities.
Operating Segments
In general, management’s discussion of Dominion’s results of
operations focuses on the contributions of its operating seg-
ments. However, the discussion of Dominion’s financial condi-
tion under Liquidity and Capital Resources is based on legal
entities as Dominion transacts business in the financial markets
on that basis. Dominion’s three primary operating segments are:
Dominion Energy manages Dominion’s generation portfolio,
consisting primarily of generating units and power purchase
agreements. It also manages Dominion’s energy trading and
marketing, hedging and arbitrage activities; and gas pipeline
and certain gas production and storage operations. 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 pur-
poses, and consumes in generation activities. Effective January
1, 2003, Dominion’s electric transmission operations became a
part of Dominion Energy.
Dominion Delivery manages Dominion’s electric and gas dis-
tribution systems, as well as customer service and electric trans-
mission functions. 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 condi-
tions. Dominion Delivery’s electric and gas businesses are subject
to cost-of-service rate regulation; changes in prices of commodi-
ties consumed or delivered are generally recoverable in rates
charged to customers. However, certain rates may be subject to
price caps, limiting recovery of higher costs in certain circum-
stances. Dominion Delivery also includes Dominion’s interest in
Dominion Fiber Ventures LLC (DFV), a telecommunications
joint venture. See Note 30 for a discussion of Dominion’s consol-
idation of DFV beginning in February 2003. Effective January 1,
operational risks that are inherent in the exploration and pro-
duction business and could result in disruption of production.
In addition, in connection with the use of financial derivatives
to hedge future sales of gas and oil production, Dominion’s
liquidity may sometimes be affected by margin requirements.
Under these requirements, Dominion must deposit funds with
counterparties to cover the fair value of covered contracts in
excess of agreed-upon credit limits. Some of these factors could
have compounding effects that could also affect Dominion’s
financial results. Also, because Dominion follows the full cost
method of accounting for gas and oil exploration and produc-
tion activities prescribed by the Securities and Exchange Com-
mission (SEC), short-term market declines in the prices of
natural gas and oil could adversely affect its financial results.
Under the full cost method, all direct costs of property acquisi-
tion, 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 based
on hedge-adjusted period-end prices from the production of
proved gas and oil reserves (the ceiling test). If net capitalized
costs exceed the ceiling test, in a given country, 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 flows from
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 its cost
of borrowing or restrict its ability to access one or more financial
markets. Such disruptions could include an economic down-
turn, the bankruptcy of an unrelated energy company or
changes to Dominion’s credit ratings. Restrictions on Domin-
ion’s ability to access financial markets may affect its ability to
execute its business plan as scheduled.
Changing Rating Agency Requirements Could Negatively
Affect Dominion’s Growth and Business Strategy
As of March 1, 2003, Dominion’s senior unsecured debt is rated
BBB+, stable outlook, by Standard & Poor’s Rating Group, a
division of the McGraw-Hill Companies, Inc. (Standard &
Poor’s) and Baa1, negative outlook, by Moody’s Investor Service
(Moody’s). Both agencies have recently implemented more
stringent applications of the financial requirements for various
ratings levels. In order to maintain its current credit ratings in
light of these or future new requirements, Dominion may find
it necessary to take steps or change its business plans in ways
that may adversely affect its growth and earnings per share. A
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Dominion ’02 Annual Report