Dominion Power 2005 Annual Report Download - page 51

Dominion 2005 49
in the fair value of currency forward contracts held at December
31, 2005 and 2004, respectively.
Investment Price Risk
We are subject to investment price risk due to marketable securi-
ties held as investments in decommissioning trust funds. These
marketable securities are reported on our Consolidated Balance
Sheets at fair value. We recognized net realized gains (net of invest-
ment income) on nuclear decommissioning trust investments of
$67 million in 2005 and $51 million in 2004. We recorded, in
AOCI, net unrealized gains on decommissioning trust investments
of $27 million and $84 million in 2005 and 2004, respectively.
We also sponsor employee pension and other postretirement ben-
efit plans that hold investments in trusts to fund benefit payments. To
the extent that the values of investments held in these trusts decline,
the effect will be reflected in our 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. Our pension
plans experienced net realized and unrealized gains of $433 million
and $453 million in 2005 and 2004, respectively.
Risk Management Policies
We have operating procedures in place that are administered by
experienced management to help ensure that proper internal con-
trols are maintained. In addition, we have established an indepen-
dent function at the corporate level to monitor compliance with the
risk management policies of all subsidiaries. We maintain credit
policies that include the evaluation of a prospective counterparty’s
financial condition, collateral requirements where deemed neces-
sary, and the use of standardized agreements that facilitate the
netting of cash flows associated with a single counterparty. In addi-
tion, we also monitor the financial condition of existing counterpar-
ties on an ongoing basis. Based on our credit policies and the
December 31, 2005 provision for credit losses, management
believes that it is unlikely that a material adverse effect on our
financial position, results of operations or cash flows would occur
as a result of counterparty nonperformance.
Risk Factors
Our business is influenced by many factors that are difficult to pre-
dict, involve uncertainties that may materially affect actual results
and are often beyond our control. We have identified a number of
these factors below. For other factors that may cause actual results
to differ materially from those indicated in any forward-looking
statement or projection contained in this report, see
Forward-Looking Statements.
Our operations are weather sensitive. Our results of opera-
tions can be affected by changes in the weather. Weather condi-
tions directly influence the demand for electricity and natural gas
and affect the price of energy commodities. In addition, severe
weather, including hurricanes, winter storms and droughts, can be
destructive, causing outages, production delays and property dam-
age that require us to incur additional expenses.
We are subject to complex governmental regulation that
could adversely affect our operations. Our operations are sub-
ject to extensive federal, state and local regulation and may require
numerous permits, approvals and certificates from various govern-
mental agencies. We must also comply with environmental legisla-
tion and associated regulations. Management believes the
necessary approvals have been obtained for our existing operations
and that our business is conducted in accordance with applicable
laws. However, new laws or regulations, or the revision or reinter-
pretation of existing laws or regulations, may require us to incur
additional expenses.
Costs of environmental compliance, liabilities and litiga-
tion could exceed our estimates, which could adversely affect
our 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 con-
tainment expenses and monitoring obligations. In addition, we may
be a responsible party for environmental clean-up at a site identi-
fied by a regulatory body. Management cannot predict with cer-
tainty 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.
We are exposed to cost-recovery shortfalls because of
capped base rates and amendments to the fuel factor statute
in effect in Virginia for our regulated electric utility. Under the
Virginia Restructuring Act, as amended in 2004, our base rates
(excluding, generally, a fuel factor with limited adjustment provi-
sions, and certain other allowable adjustments) remain capped
through December 31, 2010 unless modified or terminated consis-
tent with the Virginia Restructuring Act. Although the Virginia
Restructuring Act allows for the recovery of certain generation-
related costs during the capped rates period, we remain exposed to
numerous risks of cost-recovery shortfalls. These include exposure
to stranded costs, future environmental compliance requirements,
certain tax law changes, costs related to hurricanes or other
weather events, inflation, the cost of obtaining replacement power
during unplanned plant outages and increased capital costs.
In addition, under the 2004 amendments to the Virginia fuel
factor statute, our 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 Commission, with no deferred fuel
accounting. The amendments provide for a one-time adjustment of
our fuel factor, effective July 1, 2007 through December 31, 2010
(unless capped rates are terminated earlier), with no adjustment for
previously incurred over-recovery or under-recovery. As a result of
the current locked-in fuel factor and the uncertainty of what the
one-time adjustment will be, we are exposed to fuel price and other
risks. These risks include exposure to increased costs of fuel,
including purchased power costs, differences between our pro-
jected and actual power generation mix and generating unit perfor-
mance (which affects the types and amounts of fuel we use), and
differences between fuel price assumptions and actual fuel prices.
Under the Virginia Restructuring Act, the generation por-
tion of our electric utility operations is open to competition
and resulting uncertainty. Under the Virginia Restructuring Act,
the generation portion of our electric utility operations in Virginia is
open to competition and is no longer subject to cost-based regula-
tion. To date, a competitive retail market has been slow to develop.
Consequently, it is difficult to predict the pace at which a competi-
tive environment will evolve and the extent to which we will face
increased competition and be able to operate profitably within this
competitive environment.