Dominion Power 2001 Annual Report Download - page 62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
estimates, Dominion recognized a write-down of the carrying
values of its retained interests in mortgage and CLO/CDO securi-
tizations of $21 million and $81 million, respectively, during the
fourth quarter of 2001. See Note 13 for significant credit loss,
prepayment and discount rate assumptions.
Loans and Other Investments
The other impairments and loss provisions reflect Dominion’s
current estimate of net realizable values considering the dramati-
cally weakened economy and increasing instances of bankrupt-
cies, defaults, and major restructurings that significantly
diminished investment values in the fourth quarter of 2001.
Dominion’s valuation methodologies and assumptions vary by
investment and include cash flow analysis, signed contracts,
independent third-party appraisals, and, in certain cases,
liquidation value.
Extraordinary Item
In 1999, legislation was passed that established a detailed plan to
restructure the electric utility industry in Virginia. The legisla-
tion’s deregulation of generation was an event that required dis-
continuation of SFAS No. 71 for Dominion’s generation
operations in 1999. Dominion’s transmission and distribution
operations continue to meet the criteria for recognition of regu-
latory assets and liabilities as defined by SFAS No. 71. In addi-
tion, the cost of fuel used in electric generation continues to be
subject to deferral accounting.
In order to measure the amount of regulatory assets to be
written off upon discontinuance of SFAS No. 71, Dominion
evaluated the estimated recovery of regulatory assets through its
Virginia jurisdictional rates during the transition period ending
July 2007. Generation-related assets and liabilities that will not
be recovered through the transition period rates were written off
in 1999, resulting in an after-tax charge to earnings of $255 mil-
lion. See Note 18 for discussion of net regulatory assets at
December 31, 2001. The $255 million charge also included the
write-off of approximately $38 million, after-tax, of deferred
investment tax credits and approximately $18 million, after-tax,
of other generation-related assets. A corresponding regulatory
asset of $23 million was established representing the amount
expected to be recovered during the transition period related to
these assets.
The events that caused the discontinuance of SFAS No. 71
for generation-related operations, also required a review of
generation assets for impairment. This review was based on
estimates of possible future market prices, load growth,
competition and other assumptions. It also included the effects
Note 9
of nuclear decommissioning and other currently identified envi-
ronmental expenditures. Based on those analyses, no plant
write-downs were appropriate at that time.
Dominion also reviewed its long-term power purchase
contracts for potential loss in accordance with SFAS No. 5,
Accounting for Contingencies, and Accounting Research Bulletin
No. 43, Chapter 4, Inventory Pricing. Based on projections of
possible future market prices for wholesale electricity as of
March 31, 1999, the results of the analysis indicated no loss
recognition was appropriate at that time. Other projections of
possible future market prices indicated a possible loss of $500
million. In the absence of the transition period rates provided by
the legislation, the potential loss exposure would have been
approximately $3.2 billion at March 31, 1999.
Significant estimates were required in recording the effect
of the deregulation legislation, including the resulting impact on
the fair value determination of generating facilities and esti-
mated purchases under long-term power purchase contracts.
Such projections were highly dependent on future customer load
projections, generating unit availability, the timing and type of
future capacity additions in Dominion’s market area and future
market prices for fuel and electricity.
Income Taxes
Income before provision for income taxes, classified by source of
income, before minority interests, was as follows:
(millions) Year ended December 31, 2001 2000 1999
U.S. $816 $552 $797
Non-U.S. 98 48 32
Tot al $914 $600 $829
Details of income tax expense were as follows:
(millions) Year ended December 31, 2001 2000 1999
Current
Federal $104 $ 255 $187
State 62 20 18
Non-U.S. 3 — 4
Total current 169 275 209
Deferred
Federal 151 (111) 66
State 24 16 —
Non-U.S. 45 22 (1)
Total deferred 220 (73) 65
Amortization of deferred
investment tax credits—net (19) (19) (15)
Total income tax expense $370 $ 183 $259
Note 10
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