Dominion Power 2003 Annual Report Download - page 32

30.Dominion 2003
Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
interests. Those key assumptions include: loan prepayment
speeds, credit losses, forward yield curves and discount rates.
Using a published forward yield curve, cash flows, net of adjust-
ments for expected credit losses and loan prepayments, are dis-
counted to determine the estimated fair value of the retained
interests. Loan prepayment speeds and credit loss assumptions
are based on actual historical results and future estimates. The
discount rate is risk adjusted and is periodically compared to
industry averages and recent or similar transactions for reason-
ableness. Changes in interest rates will result in a change in the
forward yield curve and can result in a change in the assumed
amount of loan prepayments. Changes in general economic con-
ditions may impact actual credit losses, thus impacting the credit
loss assumption used in Dominion’s quarterly evaluation. Income
from the residual interests is reported as other revenue. See Note
27 to the Consolidated Financial Statements for a discussion of
impairment charges recorded in 2003, 2002 and 2001.
Newly Adopted Accounting Standards in 2003
During 2003, Dominion was required to adopt several new
accounting standards which affect the comparability of its Con-
solidated Financial Statements. The requirements of those stan-
dards are discussed in Notes 2 and 3 to the Consolidated
Financial Statements. The following discussion is presented to
provide an understanding of the financial statement impacts of
those standards when comparing the 2003 Consolidated Finan-
cial Statements to prior years.
SFAS No. 143
Adopting Statement of Financial Accounting Standards (SFAS)
No. 143, Accounting for Asset Retirement Obligations, on Janu-
ary 1, 2003, affected the comparability of Dominion’s 2003 Con-
solidated Financial Statements to those of prior years as follows:
• Recognition of asset retirement obligations of $1.5 billion com-
pared to a liability of $1.6 billion that had been previously
recorded for nuclear decommissioning;
• Recognition of $350 million of capitalized asset retirement
costs in property, plant and equipment and a $90 million
increase in accumulated depreciation, depletion and amortiza-
tion, representing the depreciation of such costs through Decem-
ber 31, 2002;
• Beginning in 2003, accretion of the AROs, including nuclear
decommissioning, is reported in other operations and mainte-
nance expense. Previously, expenses associated with the provi-
sion for nuclear decommissioning were reported in depreciation
expense and in other expense, as described below and
• Beginning in 2003, realized and unrealized earnings of trusts
available for funding decommissioning activities at Dominion’s
utility nuclear plants are recorded in other income and other com-
prehensive income, as appropriate. Previously, as permitted by
regulatory authorities, these earnings were recorded in other
income with an offsetting charge to expense, also recorded in
other income, for the accretion of the decommissioning liability.
EITF 02-3 and EITF 03-11
The adoption of Emerging Issues Task Force (EITF) Issue No. 02-3,
Issues Involved in Accounting for Derivative Contracts Held for
Trading Purposes and Contracts Involved in Energy Trading and
Risk Management Activities and the related EITF 03-11, Reporting
Realized Gains and Losses on Derivative Instruments That Are
Subject to FASB Statement No. 133 and Not “Held for Trading
Purposes” as Defined in Issue No. 02-3, changed the timing of
recognition in earnings for certain Clearinghouse energy-related
contracts, as well as the financial statement presentation of
gains and losses associated with energy-related contracts. The
Consolidated Statements of Income for 2002 and 2001 were not
restated. Prior to 2003, all energy trading contracts, including
non-derivative contracts, were recorded at fair value with
changes in fair value and settlement reported in revenue on
a net basis. Specifically, adopting EITF 02-3 and EITF 03-11
affected the comparability of Dominion’s 2003 Consolidated
Financial Statements to those of prior years as follows:
• For derivative contracts not held for trading purposes that
involve physical delivery of commodities, unrealized gains and
losses and settlements on sales contracts are presented in rev-
enue, while unrealized gains and losses and settlements on pur-
chase contracts are reported in expenses and
• Non-derivative energy-related contracts, previously subject to
fair value accounting under prior accounting guidance, are no
longer subject to fair value accounting. Dominion recognizes rev-
enue or expense on a gross basis at the time of contract perfor-
mance, settlement or termination.
FIN 46R
Upon adoption of FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities (FIN 46R) on
December 31, 2003 with respect to special purpose entities,
Dominion was required to consolidate certain variable interest
lessor entities through which Dominion had financed and leased
several new power generation projects, as well as its corporate
headquarters and aircraft. As a result, the Consolidated Balance
Sheet as of December 31, 2003 reflects an additional $644 mil-
lion in net property, plant and equipment and deferred charges
and $688 million of related debt.