Dominion Power 2007 Annual Report Download - page 50

Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
P LANNED C APITAL E XPENDITURES
Our planned capital expenditures are expected to total approx-
imately $3.7 billion in 2008 and approximately $4.1 billion
annually in both 2009 and 2010. These expenditures are expected
to include construction and expansion of electric generation and
LNG facilities and natural gas transmission and storage facilities,
environmental upgrades, construction improvements and
expansion of electric transmission and distribution assets, pur-
chases of nuclear fuel and expenditures to explore for and develop
natural gas and oil properties. We expect to fund our capital
expenditures with cash from operations and a combination of
securities issuances and short-term borrowings. Our planned capi-
tal expenditures include capital projects that are subject to appro-
val by regulators and our Board of Directors.
Based on available generation capacity and current estimates
of growth in customer demand, our Virginia electric utility will
need additional generation in the future. See Generation
Expansion in Future Issues and Other Matters for a discussion of
our Virginia electric utility’s expansion plans.
We may choose to postpone or cancel certain planned capital
expenditures in order to mitigate the need for future debt financ-
ings and equity issuances.
Use of Off-Balance Sheet Arrangements
G UARANTEES
We primarily enter into guarantee arrangements on behalf of our
consolidated subsidiaries. These arrangements are not subject to
the recognition and measurement provisions of FASB Inter-
pretation No. 45, Guarantor’s Accounting and Disclosure Require-
ments for Guarantees, Including Indirect Guarantees of Indebtedness
of Others. See Note 24 to our Consolidated Financial Statements
for further discussion of these guarantees.
At December 31, 2007, we had issued $41 million of guar-
antees to support third parties and equity method investees. In
addition, in December 2006, we acquired a 50% interest in a
joint venture with Shell to develop a wind-turbine facility in
Grant County, West Virginia (NedPower). We have issued a
limited-scope guarantee and indemnification for one-half of the
project-level financing for phase one of the NedPower wind
project. Under this guarantee, we would be required to repay
one-half of NedPower’s debt, only if it is unable to do so, as a
direct result of an unfavorable ruling associated with current liti-
gation seeking to halt the project. The guarantee will terminate
when a final non-appealable ruling in favor of the project is
received. We do not expect an unfavorable ruling and no sig-
nificant amounts have been recorded. Our exposure under the
guarantee totaled $56 million as of December 31, 2007 and will
increase to $103 million in 2008 based upon NedPower’s future
expected borrowings to complete phase one. Shell WindEnergy
Inc. has provided an identical guarantee for the other one-half of
NedPower’s borrowings.
L EASING A RRANGEMENT
We lease the Fairless power station (Fairless) in Pennsylvania,
which began commercial operations in June 2004. During con-
struction, we acted as the construction agent for the lessor, con-
trolled the design and construction of the facility and have since
been reimbursed for all project costs ($898 million) advanced to
the lessor. We make annual lease payments of $53 million. The
lease expires in 2013 and at that time, we may renew the lease at
negotiated amounts based on original project costs and current
market conditions, subject to lessor approval; purchase Fairless at
its original construction cost; or sell Fairless, on behalf of the les-
sor, to an independent third party. If Fairless is sold and the pro-
ceeds from the sale are less than its original construction cost, we
would be required to make a payment to the lessor in an amount
up to 70.75% of original project costs adjusted for certain other
costs as specified in the lease. The lease agreement does not con-
tain any provisions that involve credit rating or stock price trigger
events.
Benefits of this arrangement include:
‰Certain tax benefits as we are considered the owner of the
leased property for tax purposes. As a result, we are entitled to
tax deductions for depreciation not recognized for financial
accounting purposes; and
‰As an operating lease for financial accounting purposes, the
asset and related borrowings used to finance the construction
of the asset are not included in our Consolidated Balance
Sheets. Although this improves measures of leverage calcu-
lated using amounts reported in our Consolidated Financial
Statements, credit rating agencies view lease obligations as
debt equivalents in evaluating our credit profile.
48 Dominion 2007 Annual Report