Dominion Power 2005 Annual Report Download - page 76

Notes to Consolidated Financial Statements, Continued
Note 16. Variable Interest Entities
FIN 46R addresses the consolidation of VIEs. An entity is consid-
ered a VIE under FIN 46R if it does not have sufficient equity to
finance its activities without assistance from variable interest hold-
ers or if its equity investors lack any of the following characteristics
of a controlling financial interest:
•control through voting rights,
•the obligation to absorb expected losses, or
•the right to receive expected residual returns.
FIN 46R requires the primary beneficiary of a VIE to consolidate
the VIE and to disclose certain information about its significant vari-
able interests in the VIE. The primary beneficiary of a VIE is the
entity that receives the majority of a VIE’s expected losses,
expected residual returns, or both.
Certain variable pricing terms in some of our long-term power
and capacity contracts cause them to be considered potential vari-
able interests in the counterparties. Six potential VIEs, with which
we have existing power purchase agreements (signed prior to
December 31, 2003), have not provided sufficient information for
us to perform our FIN 46R evaluation.
We have since determined that our interest in two of the poten-
tial VIEs is not significant. In addition, in May 2005, we paid $215
million to divest our interest in a long-term power tolling contract
with a 551 megawatt combined cycle facility located in Batesville,
Mississippi, which was considered to be a potential VIE. We
decided to divest our interest in the long-term power tolling con-
tract in connection with our reconsideration of the scope of certain
trading activities, including those conducted on behalf of our busi-
ness segments, and our ongoing strategy to focus on business
activities within the energy intensive Northeast, Mid-Atlantic and
Midwest regions of the United States.
As of December 31, 2005, no further information has been
received from the three remaining potential VIEs. We will continue
our efforts to obtain information and will complete an evaluation of
our relationship with each of these potential VIEs if sufficient infor-
mation is ultimately obtained. We have remaining purchase commit-
ments with these three potential VIE supplier entities of $2.0 billion
at December 31, 2005. We paid $196 million, $199 million and
$199 million for electric generation capacity and $243 million,
$149 million and $134 million for electric energy to these entities for
the years ended December 31, 2005, 2004 and 2003, respectively.
In October 2005, we reached an agreement in principle to
restructure three long-term power purchase contracts with two
potential variable interest entities. The restructured contracts expire
between 2015 and 2017 and are expected to reduce capacity and
energy payments by approximately $44 million and $6 million,
respectively, over the remaining term of the contracts. The transac-
tion became effective in February 2006 and did not result in a cash
outlay or charge to earnings. Total debt held by the entities is
approximately $320 million. After completing our FIN 46R analysis,
we concluded that although our interest in the contracts, as a result
of their pricing terms, represent variable interests in these potential
variable interest entities, we are not the primary beneficiary.
During 2005, we entered into four long-term contracts with unre-
lated limited liability corporations (LLCs) to purchase synthetic fuel
produced from coal. Certain variable pricing terms in the contracts
protect the equity holders from variability in the cost of their coal
purchases, and therefore, the LLCs were determined to be VIEs.
After completing our FIN 46R analysis, we concluded that although
our interests in the contracts, as a result of their pricing terms, rep-
resent variable interests in the LLCs, we are not the primary benefi-
ciary. We paid $205 million to the LLCs for coal and synthetic fuel
produced from coal in 2005. We are not subject to any risk of loss
from the contractual arrangements, as our only obligation to the
VIEs is to purchase the synthetic fuel that the VIEs produce
according to the terms of the applicable purchase contracts.
In accordance with FIN 46R, we consolidate certain variable
interest lessor entities through which we have financed and leased
several power generation projects. Our Consolidated Balance Sheets
as of December 31, 2005 and 2004 reflect net property, plant
and equipment of $943 million and $963 million, respectively
and $1.1 billion of debt related to these entities. The debt is
nonrecourse to us and is secured by the entities’ property, plant
and equipment.
74 Dominion 2005