Dominion Power 2002 Annual Report Download - page 55

Other Matters
Pension Costs
As discussed in Note 26 to the Consolidated Financial State-
ments, Dominion maintains qualified noncontributory defined
benefit retirement plans. Generally, Dominion’s funding policy
is to contribute annually an amount that is in accordance with
the provisions of the Employment Retirement Income Security
Act of 1974. Investment experience and market conditions,
including interest rates, impact the measurement of these
benefit obligations and the cost of providing such benefits.
Accordingly, assumptions for discount rates and the expected
long-term rate of return on investments are important consider-
ations under SFAS No. 87, Employers’ Accounting for Pensions.
However, since the objective of SFAS No. 87 is to recognize
the cost of providing benefits over employees’ service period,
it permits the delayed recognition of certain elements of
retirement plan results.
Dominion has reviewed the assumption used for expected
long-term rate of return on plan assets to better reflect antici-
pated future market conditions and has adopted an expected
rate of 8.75 percent for 2003. This change, combined with
other factors such as a revised discount rate assumption of 6.75
percent for 2003, will reduce Dominion’s 2003 pension credit
by an estimated $66 million, as compared to 2002. In addition,
in order to maintain the funded status of its retirement plans,
Dominion may have to contribute increased amounts to the
plans in future years. If, in the future, the accumulated benefit
obligations of Dominion’s retirement plans should exceed the
fair value of the plans’ investments at year-end, Dominion
would have to recognize a minimum pension liability for that
amount. Furthermore, the recognition of a minimum pension
liability would require the elimination of any prepaid pension
cost reported on Dominion’s Consolidated Balance Sheet at that
time, resulting in a charge to other comprehensive income and
a material adverse impact on common shareholders’ equity.
Workforce Reductions
In January 2003, Dominion announced plans to eliminate
some union and salaried positions during 2003. The workforce
reductions will affect primarily support positions, including
meter readers, supply and warehouse workers and auto mechan-
ics. Many of the reductions result from investments in auto-
mated meter-reading technology and the purchases of newer,
lower maintenance vehicles. Affected workers will be offered
severance packages, and benefits for union workers will be
negotiated during 2003. Pending completion of the process to
identify affected positions, Dominion has not estimated the
cost of the workforce reductions.
Expiration of Section 29 Tax Credits
The Internal Revenue Code Section 29 “Credit for the Produc-
tion of Fuel from Nonconventional Sources” (also referred to as
the production tax credit) allows income tax credits for certain
qualified production, including some natural gas, sold before
January 1, 2003. Congress has not acted on legislation to
extend this credit beyond 2002 for most qualified production.
Whether Congress will take any action to extend the credit
during the current term is uncertain. Dominion utilized
approximately $36 million of these credits for the year ending
December 31, 2002.
Nuclear Relicensing
Dominion filed applications with the Nuclear Regulatory
Commission (NRC) for 20-year life-extensions for the North
Anna and Surry units in May 2001. The NRC has completed
its review of the applications and Dominion expects to receive
a renewed license for these units in 2003.
Dominion has also performed an internal assessment on
the probability of a successful license renewal application for
both of its operating Millstone units. Based on this assessment
and other factors, Dominion has initiated preparations to apply
for a 20-year extension of the licenses for both its operating
Millstone units. Dominion expects to file a completed applica-
tion based on NRC guidelines in 2004.
Nuclear Insurance
The Price Anderson Act expired in August 2002, but operating
nuclear reactors would continue to be covered by the law, which
would channel and cap claims if a nuclear accident should
occur. The Act has been renewed three times since 1957, and
Congress is currently holding hearings to reauthorize the legisla-
tion. The expiration of the Act does not impact the coverage of
existing nuclear license holders.
Effect of Changes in Commodity Prices
Dominion’s operations are impacted by changes in energy com-
modity prices. When energy commodities are sold by one of
Dominion’s utilities subject to cost-of-service rate regulation,
commodity costs are generally recovered through rates. Market
price changes impact Dominion’s revenue from natural gas and
oil production and from commodity sales through unregulated
subsidiaries. Dominion has established an enterprise risk man-
agement function to evaluate these risks and to recommend
actions to management that are intended to mitigate such risks.
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Dominion ’02 Annual Report