Dominion Power 2006 Annual Report Download - page 55

MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
December 31, 2005, would have resulted in adecrease in annual
earnings of approximately $20 million.
In addition,weretain ownership of mortgage investments,
including subordinated bonds and interest-only residual assets
retained from securitizations of mortgage loans originated and
purchased in prior years. Note 27 to our Consolidated Financial
Statements discusses the impact of changes in value of these
investments.
Investment Price Risk
We are subject toinvestment price risk duetomarketable secu-
ritiesheld as investments in decommissioning trust funds. These
marketable securities are managedby third-party investment
managers and are reported in our Consolidated Balance Sheets at
fair value. We recognized net realized gains (including investment
income) on nuclear decommissioning trust investments of $63
million and$67million in 2006 and 2005, respectively. We
recorded, in AOCI, gross unrealized gainson these investments of
$194 million in 2006 and net unrealized gainsof $27 million in
2005.
We also sponsor employee pensionand other postretirement
benefit plans that hold investments in trusts to fund benefit
payments. To the extent that the valuesof 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 contributedto the
employee benefit plans. Our pensionand other postretirement
benefit plans experienced net realized and unrealized gainsof
$674 million and $484 million in 2006 and 2005, respectively.
As of December 31, 2006, a hypothetical 0.25% decrease in the
assumed rates of return on our plan assetswould result in an
increase in net periodic cost of approximately $11 million for
pensionbenefits and $2 million forother postretirement benefits.
As of December 31, 2005, a hypothetical 0.25% decrease in the
assumed rates of return on our plan assetswould have resulted in
an increase in net periodic cost of approximately $10 million for
pensionbenefits and $2 million forother postretirement benefits.
Risk Management Policies
We have established operatingprocedures with corporate manage-
ment toensure that proper internal controlsaremaintained. In
addition, we have established an independent function at the
corporate leveltomonitor compliance with therisk management
policies of all subsidiaries. We maintain credit policies that
include the evaluation of aprospective counterparty’s financial
condition, collateral requirements where deemed necessary, and
the use of standardized agreements that facilitate the netting of
cash flows associated with asingle counterparty. In addition, we
also monitor thefinancial condition of existing counterparties on
an ongoingbasis. Based on our credit policies and the
December 31, 2006 provision forcredit losses, management
believes that it is unlikely that amaterial adverse effect on our
financial position, results of operations or cash flows would occur
as aresult of counterparty nonperformance.
RISK FACTORS
Our business is influenced by many factors that are difficult to
predict, involve uncertainties that maymaterially affect actual
results and are often beyondourcontrol. We have identified a
number of these factors below. For other factors that maycause
actual results to differ materially from thoseindicatedinany
forward-looking statement or projection contained in this report,
see Forward-Looking Statements.
Our operations are weather sensitive. Our results of operations
can be affected by changes in the weather. Weather conditions
directly influence the demand for electricity and natural gasand
affect the price of energy commodities. In addition,severe weath-
er, including hurricanes, winter storms and droughts, can be
destructive, causing outages, productiondelays and property
damagethat require us to incur additional expenses.
We are subject tocomplex governmental regulation that could
adversely affect our operations. Our operations are subject to
extensive federal, state and local regulation andrequire numerous
permits, approvals and certificates from various governmental
agencies. We must alsocomply with environmental legislation
and associated regulations. Management believes that the neces-
sary 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
reinterpretation of existing laws or regulations, may require us to
incur additional expenses.
Costs of environmental compliance, liabilities and litigation 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, includingremediation and containment expenses and
monitoring obligations. In addition, wemaybearesponsible party
for environmental clean-up at asite identified by aregulatory
body. Management cannot predict withcertainty the amount and
timing ofallfutureexpenditures related to environmental matters
because of the difficultyof estimating clean-up and compliance
costs, and the possibility that changes willbemadetothecurrent
environmental laws and regulations. There is alsouncertainty in
quantifying liabilities under environmental laws that impose joint
and several liability onallpotentially responsible parties.
We are exposed to cost-recovery shortfalls becauseofcapped
base rates and amendments tothefuel factor statute ineffect in Vir-
ginia for our regulated electric utility. Under the 1999 Virginia
RestructuringAct, asamended, our base rates remain capped
through December 31, 2010 unless sooner modified or termi-
nated. Although this Act allows for therecovery of certain
generation-related costs during the cappedrates period, we remain
exposed tonumerous risks of cost-recovery shortfalls. These risks
include exposure tostranded costs, future environmental com-
pliancerequirements, certaintax law changes, costs related to
hurricanes orother weather events, inflation, the costofobtaining
replacement power duringunplanned plant outages and increased
capital costs.
In addition, our current Virginia fuel factor provisions are
locked-in until July1,2007, with no deferred fuelaccounting. As
aresult, untilJuly1,2007 we are exposedtofuel price and other
risks.These risksinclude exposuretoincreased costsoffuel,
including purchased power costs, differences between our pro-
jected and actualpower generation mix and generating unit per-
formance (which affects thetypes and amounts offuel weuse) and
differences between fuel price assumptions and actual fuel prices.
Annual fuel rate adjustments, with deferred fuel accounting for
over-orunder-recoveries offuel costs, willbeinstituted for three
twelve-month periodsbeginning July 1, 2007. The Virginia
54 DOMINION2006 Annual Report