Dominion Power 2003 Annual Report Download - page 51

49.Dominion 2003
would have resulted in a decrease in fair value of approximately
$424 million and $357 million as of December 31, 2003 and
December 31, 2002, respectively.
The impact of a change in energy commodity prices on
Dominion’s non-trading derivative commodity instruments at a
point in time is not necessarily representative of the results that
will be realized when such contracts are ultimately settled. Net
losses from derivative commodity instruments used for hedging
purposes, to the extent realized, are substantially offset by recog-
nition of the hedged transaction, such as revenue from sales.
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.
For financial instruments outstanding at December 31, 2003, a
hypothetical 10% increase in market interest rates would decrease
annual earnings by approximately $10 million. A hypothetical
10% increase in market interest rates, as determined at December
31, 2002, would have resulted in a decrease in annual earnings
of approximately $4 million.
In addition, Dominion, through subsidiaries, retains ownership
of mortgage investments, including subordinated bonds and
interest-only residual assets retained from securitizations of mort-
gage loans originated and purchased in prior years. Note 27 to
the Consolidated Financial Statements discusses the impact of
changes in value of these investments.
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. Dominion’s management
monitors this exposure and believes it is not material. In addition,
Dominion manages its foreign exchange risk exposure associated
with anticipated future purchases of nuclear fuel processing
services denominated in foreign currencies by utilizing currency
forward contracts. As a result of holding these contracts as
hedges, Dominion’s exposure to foreign currency risk is minimal.
A hypothetical 10% unfavorable change in relevant foreign
exchange rates would have resulted in a decrease of approxi-
mately $19 million and $22 million in the fair value of currency
forward contracts held by Dominion at December 31, 2003 and
2002, respectively.
Investment Price Risk
Dominion is subject to investment price risk due to marketable
securities held as investments in decommissioning trust funds. In
accordance with current accounting standards, these marketable
securities are reported on the Consolidated Balance Sheets at fair
value. Dominion recognized a net realized loss (net of investment
income) of $10 million and a net unrealized gain of $263 million
on decommissioning trust investments for the year ended 2003.
For the year ended December 31, 2002, Dominion recognized a
net realized gain (including investment income) of $32 million
and a net unrealized loss of $166 million.
Dominion also sponsors employee pension and other postre-
tirement benefit plans that hold investments in trusts to fund bene-
fit payments. To the extent that the values of investments held in
these trusts decline, the effect will be reflected in Dominion’s
recognition of the periodic cost of such employee benefit plans
and the determination of the amount of cash to be contributed to
the employee benefit plans. During 2003, Dominion’s pension
plans experienced net realized and unrealized gains of
$627 million and in 2002 net realized and unrealized losses
of $241 million.
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 risk management policies of all sub-
sidiaries. Dominion maintains credit policies that include the eval-
uation of a prospective counterparty’s financial condition,
collateral requirements where deemed necessary, and the use of
standardized agreements that 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. Based on credit policies and the December 31,
2003 provision for credit losses, management believes 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.
Risk Factors and Cautionary
Statements That May Affect
Future Results
Factors that may cause actual results to differ materially from
those indicated in any forward-looking statement include weather
conditions; governmental regulations; cost of environmental com-
pliance; inherent risk in the operation of nuclear facilities; fluctua-
tions in energy-related commodities prices and the effect these
could have on Dominion’s earnings, liquidity position and the
underlying value of its assets; trading counterparty credit risk;
capital market conditions, including price risk due to marketable
securities held as investments in trusts and benefit plans; fluctua-
tions in interest rates; changes in rating agency requirements and
ratings; changes in accounting standards; collective bargaining
agreements and labor negotiations; the risks of operating busi-
nesses in regulated industries that are becoming deregulated; the
transfer of control over electric transmission facilities to a regional