Dominion Power 2003 Annual Report Download - page 53

51.Dominion 2003
Dominion is exposed to market risks beyond its control in
its energy clearinghouse operations. Dominion’s energy clear-
inghouse and risk management operations are subject to multiple
market risks including market liquidity, counterparty credit
strength and price volatility. Many industry participants have
experienced severe business downturns resulting in some compa-
nies exiting or curtailing participation in the energy trading mar-
kets. This has led to a reduction in the number of trading partners
and lower industry trading revenues. Declining creditworthiness
of some of Dominion’s trading counterparties may limit the level
of its trading activities with these parties and increase the risk
that these parties may not perform under a contract.
Successfully executing Dominion’s exit from the telecom-
munications business is dependent upon market conditions
and timing. In September 2003, Dominion announced it would
recognize impairment charges related to DTI, its telecommunica-
tions investment, and that it plans to exit the telecommunications
business. Continued depressed market conditions in the telecom-
munications industry may make it difficult for Dominion to sell the
business as a whole, resulting in sales of telecommunications
assets that may not include a transfer of all associated liabilities.
Additionally, the difficulty in finding suitable buyers for the
telecommunications business and in obtaining required state and
federal regulatory approvals could delay the sale of the business.
If Dominion fails to sell its telecommunications business quickly,
DTI risks the loss of current customers and key employees. DTI
requires external sources of liquidity for its operating funds.
Dominion has advanced, and anticipates making additional
advances of, operating funds to DTI. Given its current financial
and operating position, it is unlikely that DTI would be able to
secure funds from other sources, so it is dependent on continued
funding from Dominion to sustain its operations. Any additional
funds provided by Dominion may not be recovered from a sale of
the telecommunications business. Until a sale occurs, Dominion’s
investment in the telecommunications business may continue
to be adversely affected and could be subject to further impair-
ment charges.
Dominion’s exploration and production business is depen-
dent on factors that cannot be predicted or controlled. Factors
that may affect Dominion’s financial results include fluctuations in
natural gas and crude oil prices, results of future drilling and well
completion activities, Dominion’s ability to acquire additional
land positions in competitive lease areas as well as inherent oper-
ational risks that could disrupt production. Dominion’s liquidity
may also be impacted by margin requirements that result from
financial derivatives used to hedge future sales of gas and oil pro-
duction and require the deposit of funds and other collateral with
counterparties to cover the fair value of covered contracts in
excess of agreed-upon credit limits. Short
— term market declines
in natural gas and oil prices may also result in the permanent
write-down of Dominion’s gas and oil properties as required by
the full cost method of accounting. Under the full cost method, all
direct costs of property acquisition, exploration and development
activities are capitalized. If net capitalized costs exceed the pre-
sent 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), 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 liquidity for capital require-
ments not satisfied by the cash flows from its operations. Manage-
ment 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 downturn, the bankruptcy of an unrelated
energy company or changes to Dominion’s credit ratings. Restric-
tions on Dominion’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 Febru-
ary 2, 2004, Dominion’s senior unsecured debt was rated BBB+,
negative outlook, by Standard & Poor’s and Baa1, stable outlook,
by Moody’s. Both agencies have recently implemented more strin-
gent 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 modify its business plans in ways that may
adversely affect its growth and earnings per share. A 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 future changes in accounting standards or practices may
have on public companies in general or the energy industry or its
operations specifically. New accounting standards could be
issued that could change the way Dominion records revenue,
expenses, assets and liabilities. These changes in accounting
standards could adversely affect Dominion’s reported earnings or
could increase reported liabilities.