Dominion Power 2001 Annual Report Download - page 68

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Energy Trading Activities
Dominion’s energy trading contracts are reported at fair value,
with corresponding changes in value recognized immediately in
earnings. Net gains and losses associated with Dominion’s com-
modity trading activities are accounted for net of related cost of
sales in nonregulated electric sales and nonregulated gas sales.
Cash flows resulting from the settlement of energy trading con-
tracts are included in net cash flows from operating activities.
The composition of operating revenue from commodity trading
activities for the years 2001, 2000 and 1999 follows:
(millions) Gains Losses Total
2001
Contract settlements $5,208 $(5,209) $ (1)
Unrealized gains and losses 1,378 (1,238) 140
Operating revenue 6,586 (6,447) 139
2000
Contract settlements 2,773 (2,692) 81
Unrealized gains and losses 1,236 (1,211) 25
Operating revenue 4,009 (3,903) 106
1999
Contract settlements 2,577 (2,481) 96
Unrealized gains and losses 114 (101) 13
Operating revenue $2,691 $(2,582) $109
Enron Bankruptcy
On December 2, 2001, Enron Corp. and certain of its sub-
sidiaries (collectively referred to as Enron) voluntarily filed for
reorganization under Chapter 11 of the United States Bank-
ruptcy Code. Dominion is a party to various contracts with
Enron that were initiated primarily for purposes of hedging
anticipated purchases and sales of natural gas and for use in its
energy trading operations. As a result of Enron’s bankruptcy fil-
ing, Dominion reexamined the estimated collectibility of its net
accounts receivable balance from Enron and the valuation of its
Enron commodity contracts carried at fair value on Dominion’s
consolidated balance sheet at December 2, 2001. In reexamining
the valuation of these assets, Dominion considered, among other
factors, its contractual ability to exercise the right of setoff, the
likelihood of continued performance by Enron under its con-
tracts and its expectation regarding amounts to be realized upon
potential future termination of its contracts by Dominion.
Based on management’s evaluation of these factors,
Dominion recorded a pre-tax charge to earnings of approxi-
mately $151 million in the fourth quarter of 2001 related to
its estimated Enron exposure. This charge is comprised of
approximately $9 million for net credit exposure on past energy
sales to Enron for which payment has not yet been received and
approximately $142 million related to the impaired fair value of
natural gas forward and swap contracts with Enron. Manage-
ment believes that this charge substantially eliminates any
further Enron-related earnings exposure. However, various con-
tingencies, including developments in the Enron bankruptcy
proceedings, may affect Dominion’s ultimate exposure to Enron.
Concurrent with the December 2, 2001 Enron bank-
ruptcy filing, Dominion’s Enron derivatives designated as
cash flow hedges of anticipated purchases and sales of natural
gas no longer qualified for hedge accounting and, accordingly,
were de-designated from their hedging relationships for
accounting purposes.
Other
In June 2001, the FASB cleared guidance that permits certain
option-type contracts for the purchase or sale of electricity to
qualify for the normal purchases and sales exception, if certain
criteria are met. Qualifying contracts, for which Dominion
elects and formally documents this exception, are not reported
at fair value, as otherwise required by SFAS No. 133. In response
to the June 2001 guidance and other guidance issued during
the second quarter, Dominion reevaluated certain of its long-
term power purchase contracts. Dominion determined that
such contracts qualified under the guidance and thus designated
them as normal purchases and sales. In late December 2001,
the FASB issued revised guidance on this matter to be effective
April 1, 2002. Dominion believes that its long-term power
purchase contracts that are currently designated as normal
purchases and normal sales will continue to qualify for
the exception.
Future interpretations of SFAS No. 133 by the FASB or
other standard-setting bodies could result in fair value account-
ing being required for certain contracts that are not currently
being subjected to such requirements. Accordingly, future inter-
pretations may impact Dominion’s ultimate application of the
standard. However, if future SFAS No. 133 interpretive guidance
results in additional contracts becoming subject to fair value
accounting, Dominion would pursue hedging strategies to miti-
gate any potential future volatility in reported earnings.
66