Dominion Power 2002 Annual Report Download - page 63

the accounting change, Dominion recognized the reduction
attributable to the re-measurement of asset retirement obliga-
tions and reclassified such amount from the accumulated provi-
sion for depreciation, depletion and amortization to other
non-current liabilities. The cumulative effect of the accounting
change also reflected a $350 million increase in property, plant
and equipment for capitalized asset retirement costs and a $90
million increase in the accumulated provision for depreciation,
depletion and amortization, representing the depreciation of
such costs through December 31, 2002.
In accordance with SFAS No. 71, Accounting for the Effects
of Certain Types of Regulation, Dominion will continue its prac-
tice of accruing for future costs of removal for its cost-of-service
rate regulated gas and electric utility assets, even if no legal
obligation to perform such activities exists. At December 31,
2002, Dominion’s accumulated depreciation, depletion and
amortization included $596 million, representing the estimated
future cost of such removal activities.
Energy Trading Contracts
In October 2002, the Emerging Issues Task Force (EITF)
rescinded EITF Issue No. 98-10, Accounting for Contracts
Involved in Energy Trading and Risk Management Activities
(EITF 98-10). As a result, certain energy-related commodity
contracts held for trading purposes will no longer be subject to
fair value accounting. The affected contracts are those energy-
related contracts held for trading purposes that are not consid-
ered to be derivatives under SFAS No. 133.Under EITF 98-10
accounting, the fair value of energy contracts was measured at
each reporting date, with changes in fair value, including unre-
alized amounts, reported in earnings. Energy-related contracts
affected by the rescission of EITF 98-10 will be subject to
accrual accounting and recognized as revenue or expense at the
time of contract performance, settlement or termination.
The rescission of EITF 98-10 primarily affects the timing
of recognition in earnings from Dominion’s energy-related trad-
ing contracts. In addition, affected contracts will no longer be
reported at fair value on Dominion’s balance sheet. The EITF
98-10 rescission was effective for all non-derivative energy trad-
ing contracts initiated after October 25, 2002. As a result of
implementing the change for all non-derivative energy trading
contracts initiated prior to October 25, 2002, Dominion recog-
nized a loss of $67 million (net of taxes of $43 million) as the
cumulative effect of this change in accounting principle
effective January 1, 2003.
Accounting for Guarantees
In November 2002, FASB issued Interpretation No. 45,
Guarantor’s Accounting and Disclosure Requirements for Guaran-
tees, Including Indirect Guarantees of Indebtedness of Others
— An
Interpretation of FASB Statements No. 5, 57 and 107 (FIN No.
45). Under FIN No. 45, issuers of certain types of guarantees
must recognize a liability based on the fair value of the guaran-
tee issued, even when the likelihood of making payments is
remote. In addition, FIN No. 45 requires increased disclosures
for specific types of guarantees.
FIN No. 45’s initial recognition requirements apply only
to guarantees issued or modified after December 31, 2002.
Dominion does not anticipate any material impact on its
future results of operations or financial condition as a result of
recording newly issued or modified guarantees at fair value.
FIN No. 45’s disclosure requirements are effective for financial
statements ending after December 15, 2002. See Note 27.
Consolidation of Variable Interest Entities
In January 2003, FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities, (FIN No. 46) which
addresses consolidation by business enterprises of entities that
are not controllable through voting interests or in which the
equity investors do not bear the residual economic risks and
rewards. These entities have been commonly referred to as
“special purpose entities.” The underlying principle behind the
new Interpretation is that if a business enterprise has the major-
ity financial interest in an entity, defined in the guidance as a
variable interest entity, the assets, liabilities, and results of the
activities of the variable interest entity should be included in
consolidated financial statements with those of the business
enterprise. FIN No. 46 explains how to identify variable interest
entities and how an enterprise should assess its interest in an
entity to decide whether to consolidate that entity. Dominion
will apply the provisions of FIN No. 46 prospectively for all
variable interest entities created after January 31, 2003. For vari-
able interest entities created before January 31, 2003, Dominion
will be required to consolidate all entities in which it was
deemed to be the primary beneficiary beginning July 1, 2003.
As discussed in Note 27, Dominion, through certain sub-
sidiaries, has entered into agreements with variable interest enti-
ties in order to finance and lease several new power generation
projects, as well as its corporate headquarters and aircraft.
Under existing accounting guidance, neither the project assets
nor related obligations are currently reported on Dominion’s
Consolidated Balance Sheets. As these variable interest entities
are currently structured, Dominion would be determined to
be the primary beneficiary under FIN No. 46 and would be
required to consolidate these variable interest entities beginning
in the third quarter of 2003. Based upon total project costs
incurred through December 31, 2002, consolidation of these
variable interest entities would result in an additional $1.6 bil-
lion in property, plant and equipment and related debt.
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Dominion ’02 Annual Report