Dominion Power 2003 Annual Report Download - page 50

48.Dominion 2003
Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Other Matters
Telecommunications Operations
In December 2003, Dominion classified the assets and related
liabilities of DTI as held-for-sale, and its results of operations as
discontinued operations. The current plan of sale anticipates a
closing by the end of June 2004. In addition DTI has long-term
obligations, including leases, maintenance agreements and other
contracts, that must be considered in the sale and may result in
additional losses in future periods depending upon the final terms
of the sale.
Millstone Operating Licenses
In January 2003, Dominion filed with the Nuclear Regulatory
Commission to renew the operating licenses of its two nuclear
units at Millstone Power Station. If renewed, Unit 2 would con-
tinue to operate until 2035 and Unit 3 until 2045.
Kewaunee Power Plant
During the fourth quarter of 2003, Dominion announced an
agreement with Wisconsin Public Service Corporation, a sub-
sidiary of WPS Resources Corporation (WPS), and Wisconsin
Power & Light Company (WP&L), a subsidiary of Alliant Energy
Corporation, to purchase the Kewaunee Power Plant, a nuclear
power station in northeastern Wisconsin. Under terms of the
agreement, the aggregate purchase price is $220 million in cash,
including $35 million for nuclear fuel. Dominion will sell 100% of
the facility’s output to WPS (59%) and WP&L (41%) under a
power purchase agreement that expires in 2013. The transaction
is expected to close in the second half of 2004, pending applica-
ble federal and state regulatory approvals. Kewaunee will be
included in the Dominion Generation operating segment.
Future Acquisitions
Because Dominion’s industry is rapidly changing, there are many
opportunities for acquisitions of assets, as well as for business
combinations. Dominion investigates any opportunity that may
increase shareholder value and build on existing businesses, with
an objective to enter into transactions that would be immediately
accretive to earnings per share. Dominion has participated in the
past
— and its security holders may assume that at any time
Dominion may be participating — in bidding or other negotiations
for such transactions. Such participation may or may not result in
a transaction for Dominion. However, any such transaction that
does take place may involve consideration in the form of cash,
debt or equity securities. It may also involve payment of a pre-
mium over book or market values. Such transactions or payments
could affect the market prices and rates for Dominion’s securities.
Market Rate Sensitive Instruments
and Risk Management
Dominion’s financial instruments, commodity contracts and
related derivative financial instruments are exposed to potential
losses due to adverse changes in interest rates, equity security
prices, foreign currency exchange rates and commodity prices.
Interest rate risk generally is related to Dominion’s outstanding
debt. Commodity price risk is present in Dominion’s electric oper-
ations, gas production and procurement operations, and energy
marketing and trading operations due to the exposure to market
shifts in prices received and paid for natural gas, electricity and
other commodities. Dominion uses derivative commodity con-
tracts to manage price risk exposures for these operations. In
addition, Dominion is exposed to equity price risk through vari-
ous portfolios of equity securities.
The following sensitivity analysis estimates the potential loss
of future earnings or fair value from market risk sensitive instru-
ments over a selected time period due to a 10% unfavorable
change in commodity prices, interest rates and foreign currency
exchange rates.
Commodity Price Risk
— Trading Activities
As part of its strategy to market energy and to manage related
risks, Dominion manages a portfolio of commodity-based deriva-
tive instruments held for trading purposes. These contracts are
sensitive to changes in the prices of natural gas, electricity and
certain other commodities. Dominion uses established policies
and procedures to manage the risks associated with these price
fluctuations and uses derivative instruments, such as futures, for-
wards, swaps and options, to mitigate risk by creating offsetting
market positions. In addition, Dominion may use its generation
capacity to satisfy commitments to sell energy when not needed
to serve customers in its service territory.
A hypothetical 10% unfavorable change in commodity prices
would have resulted in a decrease of approximately $56 million
and $12 million in the fair value of Dominion’s commodity-based
financial derivative instruments held for trading purposes as of
December 31, 2003 and December 31, 2002, respectively.
Commodity Price Risk
— Non-Trading Activities
Dominion manages the price risk associated with purchases and
sales of natural gas, oil and electricity by using derivative com-
modity instruments including futures, forwards, options and
swaps. For sensitivity analysis purposes, the fair value of
Dominion’s non-trading derivative commodity instruments is deter-
mined based on models that consider the market prices of com-
modities in future periods, the volatility of the market prices in
each period, as well as the time value factors of the derivative
instruments. Market prices and volatility are principally deter-
mined based on quoted prices on the futures exchange. A hypo-
thetical 10% unfavorable change in market prices of Dominion’s
non-trading commodity-based derivative financial instruments