Dominion Power 2002 Annual Report Download - page 90

Notes to Consolidated Financial Statements, Continued
from specified events. The specified events may involve an
adverse judgment in a lawsuit or the imposition of additional
taxes due to a change in tax law or interpretation of the tax law.
Dominion is unable to develop an estimate of the maximum
potential amount of future payments under these contracts
because events that would obligate Dominion have not yet
occurred or, if any such event has occurred, Dominion has not
been notified of its occurrence. However, at December 31,
2002, management believes future payments, if any, that could
ultimately become payable under these contract provisions,
would not have a material impact on its results of operations,
cash flows or financial position.
Stranded Costs
Under the Virginia Restructuring Act, the generation portion
of Dominion’s Virginia jurisdictional operations is no longer
subject to cost-based regulation, effective January 1, 2002.
Dominion’s base rates (excluding fuel costs and certain other
allowable adjustments) will remain capped until July 2007,
unless terminated sooner or otherwise modified consistent with
the Virginia Restructuring Act. Under the Act, Dominion may
request a termination of the capped rates at any time after Janu-
ary 1, 2004, and the Virginia State Corporation Commission
may grant Dominion’s request to terminate the capped rates, if
it finds that a competitive generation services market exists in
Dominion’s service area. Dominion believes capped electric
retail rates and, where applicable, wires charges provided under
the Virginia Restructuring Act provide an opportunity to
recover a portion of its potentially stranded costs, depending on
market prices of electricity and other factors. Stranded costs are
those costs incurred or commitments made by utilities under
cost-based regulation that may not be reasonably expected to be
recovered in a competitive market.
Even in the capped rate environment, Dominion remains
exposed to numerous risks, including, among others, exposure
to potentially stranded costs, future environmental compliance
requirements, changes in tax laws, inflation and increased
capital costs. At December 31, 2002, Dominion’s exposure to
potentially stranded costs included: long-term power purchase
contracts that could ultimately be determined to be above mar-
ket (see Power Purchase Contracts above); generating plants that
could possibly become uneconomic in a deregulated environ-
ment; and unfunded obligations for nuclear plant decommis-
sioning and postretirement benefits not yet recognized in the
financial statements. See Notes 16 and 26.
28Fair Value of Financial Instruments
Substantially all of Dominion’s financial instruments are
recorded at fair value, with the exception of the instruments
described below. Fair value amounts have been determined
using available market information and valuation methodolo-
gies considered appropriate by management. Dominion reports
the following financial instruments based on historical cost
rather than fair value.
The financial instruments’ carrying amounts and fair
values as of December 31, 2002 and 2001 were as follows:
2002 2001
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(millions)
Long-term debt(1) $14,185 $14,990 $13,473 $13,725
Preferred securities of
subsidiary trusts(2)(3) 1,397 1,441 1,132 1,154
(1) Fair value is estimated using market prices, where available; otherwise,
interest rates, currently available for issuance of debt with similar terms and
remaining maturities, are used.The carrying amount of debt issues with
short-term maturities and variable rates repriced at current market rates is
a reasonable estimate of fair value.
(2) Fair value is based on market quotations.
(3) The 2002 carrying value of $1,397 million represents principal outstanding
of $1,400 million, less an unamortized discount of $3 million, and the 2001
carrying value of $1,132 million represents principal outstanding of $1,135
million, less an unamortized discount of $3 million.
29Concentration of Credit Risk
Credit risk is the risk of financial loss to Dominion if counter-
parties fail to perform their contractual obligations. Dominion
engages in transactions for the purchase and sale of products
and services with major companies in the energy industry and
with commercial and residential energy consumers. These
transactions principally occur in the Northeast, Midwest and
Mid-Atlantic regions of the United States. Management does
not believe that this geographic concentration contributes sig-
nificantly to Dominion’s overall exposure to credit risk. Credit
risk associated with trade accounts receivable from energy con-
sumers is limited due to the large number of customers.
Dominion maintains credit policies with respect to its
counterparties that management believes minimize overall
credit risk. Where appropriate, such policies include the evalua-
tion of a prospective counterparty’s financial condition, collat-
eral requirements and the use of standardized agreements that
facilitate the netting of cash flows associated with a single coun-
terparty. Dominion also monitors the financial condition of
existing counterparties on an ongoing basis. Dominion main-
tains a provision for credit losses based upon factors surrounding
the credit risk of its customers, historical trends and other infor-
mation. Management believes, based on Dominion’s credit
88 Dominion ’02 Annual Report