Dominion Power 2004 Annual Report Download - page 53

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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. Dominion’s pension plans
experienced net realized and unrealized gains of $453 million and $627 mil-
lion in 2004 and 2003, respectively.
Risk Management Policies
Dominion has operating procedures in place that are administered by expe-
rienced management to help ensure that proper internal controls are main-
tained. In addition, Dominion has established an independent function
at the corporate level to monitor compliance with the risk management
policies of all subsidiaries. Dominion maintains credit policies that include
the evaluation of a prospective counterparty’s financial condition, collateral
requirements where deemed necessary, and the use of standardized agree-
ments 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, 2004 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 indi-
cated in any forward-looking statement include weather conditions; gov-
ernmental regulations; cost of environmental compliance; inherent risk in
the operation of nuclear facilities; fluctuations in energy-related commodi-
ties 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 secu-
rities held as investments in trusts and benefit plans; fluctuations in inter-
est rates; changes in rating agency requirements or ratings; changes in
accounting standards; collective bargaining agreements and labor negotia-
tions; the risks of operating businesses in regulated industries that are sub-
ject to changing regulatory structures; changes to regulated gas and
electric rates recovered by Dominion; receipt of approvals for and the tim-
ing of the closing dates for pending acquisitions; realization of expected
business interruption insurance proceeds; the transfer of control over elec-
tric transmission facilities to a regional transmission organization; board
approval of future dividends; political and economic conditions (including
inflation and deflation); and completing the divestiture of investments held
by DCI. Other more specific risk factors are as follows:
Dominion’s operations are weather sensitive. Dominion’s results of
operations can be affected by changes in the weather. Weather conditions
directly influence the demand for electricity and natural gas and affect the
price of energy commodities. In addition, severe weather, including hurri-
canes, winter storms and droughts, can be destructive, causing outages,
production delays and property damage that require Dominion to incur
additional expenses.
Dominion is subject to complex government regulation that could
adversely affect its operations. Dominion’s operations are subject to exten-
sive federal, state and local regulation and may require numerous permits,
approvals and certificates from various governmental agencies. Dominion
must also comply with environmental legislation and associated regula-
tions. Management believes the necessary approvals have been obtained
for Dominion’s existing operations and that its business is conducted in
accordance with applicable laws. However, new laws or regulations, or the
revision or reinterpretation of existing laws or regulations, may require
Dominion to incur additional expenses.
Costs of environmental compliance, liabilities and litigation could
exceed Dominion’s estimates which could adversely affect its results of
operations. Compliance with federal, state and local environmental laws
and regulations may result in increased capital, operating and other costs,
including remediation and containment expenses and monitoring obliga-
tions. In addition, Dominion may be a responsible party for environmental
clean-up at a site identified by a regulatory body. Management cannot
predict with certainty the amount and timing of all future expenditures
related to environmental matters because of the difficulty of estimating
clean-up and compliance costs, and the possibility that changes will be
made to the current environmental laws and regulations. There is also
uncertainty in quantifying liabilities under environmental laws that impose
joint and several liability on all potentially responsible parties.
Dominion is exposed to cost-recovery shortfalls because of capped
base rates and amendments to the fuel factor statute in effect in Virginia for
its regulated electric utility. Under the Virginia Restructuring Act, as
amended in April 2004, Dominion’s base rates (excluding, generally, a fuel
factor with limited adjustment provisions, and certain other allowable
adjustments) remain unchanged until December 31, 2010 unless modified or
terminated consistent with the Virginia Restructuring Act. Although the Vir-
ginia Restructuring Act allows for the recovery of certain generation-
related costs during the capped rates periods, Dominion remains exposed
to numerous risks of cost-recovery shortfalls. These include exposure to
potentially stranded costs, future environmental compliance requirements,
tax law changes, costs related to hurricanes or other weather events, infla-
tion, the cost of obtaining replacement power during unplanned plant out-
ages and increased capital costs. In addition, under the 2004 amendments
to the Virginia fuel factor statute, Dominion’s current Virginia fuel factor
provisions are locked-in until the earlier of July 1, 2007 or the termination
of capped rates by order of the Virginia State Corporation Commission.
The amendments provide for a one-time adjustment of Dominion’s fuel
factor, effective July 1, 2007 through December 31, 2010, with no adjust-
ment for previously incurred over-recovery or under-recovery, thus eliminat-
ing deferred fuel accounting. As a result of the locked-in fuel factor and the
uncertainty of what the one-time adjustment will be, Dominion is exposed
to fuel price risk. This risk includes exposure to increased costs of fuel,
including the energy portion of certain purchased power costs.
Under the Virginia Restructuring Act, the generation portion of
Dominion’s electric utility operations is open to competition and resulting
uncertainty. Under the Virginia Restructuring Act, the generation portion of
Dominion’s electric utility operations in Virginia is open to competition and
is no longer subject to cost-based regulation. To date, the competitive mar-
ket has been slow to develop. Consequently, it is difficult to predict the
pace at which the competitive environment will evolve and the extent to
which Dominion will face increased competition and be able to operate
profitably within this competitive environment.