Dominion Power 2002 Annual Report Download - page 64

Notes to Consolidated Financial Statements, Continued
Dominion’s maximum exposure to loss resulting from these
agreements is $1.3 billion as of December 31, 2002. This assess-
ment is based upon total project costs through December 31,
2002 and assumes the property, plant and equipment will have
no value at the end of their lease terms, which management
believes is highly unlikely. Dominion is considering other
financing structures for these projects in the future that may
result in continued off-balance sheet treatment.
As discussed in Note 30, Dominion has a 50 percent mem-
bership interest in Dominion Fiber Ventures, LLC (DFV), a
telecommunications joint venture with approximately $850
million in total assets at December 31, 2002. Under existing
accounting guidance, Dominion’s investment in this variable
interest entity has been accounted for under the equity method.
Under FIN No. 46, Dominion would have been determined
to be DFV’s primary beneficiary and thus would have been
required to consolidate DFV beginning July 1, 2003. However,
as described in Note 30 under Subsequent Event, Dominion
began consolidating DFV in February 2003 following its acqui-
sition of substantially all of DFV’s outstanding senior notes,
which significantly increased Dominion’s financial interest in
DFV. Dominion’s maximum exposure to loss related to its
involvement with DFV consists of its $85 million investment
in DFV as of December 31, 2002, as well as the $633 million
invested in DFV in February 2003 through the acquisition
of DFV’s senior notes. In addition, under the joint venture
agreements, Dominion must absorb substantially all future
DFV operating losses and is exposed to DFV’s obligation for
payments to the other DFV investor, representing a return on
its investment.
Dominion, through a Dominion Capital subsidiary, has
an interest in a developer and manufacturer of engineered
polymer products. It is likely that Dominion would be deter-
mined to be the primary beneficiary of this variable interest
entity under FIN No. 46. Dominion’s maximum exposure to
loss as a result of its involvement with this entity is $44 million
at December 31, 2002.
Dominion’s management does not anticipate that the
changes in accounting requirements will impact planned levels
of financing or its credit ratings. Dominion does not anticipate
that the adoption of FIN No. 46 will have a material impact on
its results of operations for the year ended December 31, 2003.
Other
SFAS No. 133 Guidance
In connection with the January 2003 EITF meeting, FASB was
requested to reconsider an interpretation of SFAS No. 133. The
interpretation, which is contained in the Derivatives Implemen-
tation Group’s C11 guidance, relates to contracts with pricing
terms that include broad market indices. In particular, that
guidance discusses whether the pricing in a contract that con-
tains broad market indices (e.g., consumer price index) could
qualify as a normal purchase or sale and therefore not be subject
to fair value accounting. Dominion has certain power purchase
and sale contracts that are subject to the guidance addressed in
the request for reconsideration. Dominion does not expect the
effect of implementing any change, that would ultimately be
required as a result of the guidance being clarified, to be mater-
ial to its results of operations or financial position.
Future Accounting Changes
FASB’s standard-setting process is ongoing. Some of the
projects currently on FASB’s agenda include: financial instru-
ments, revenue recognition and procedures related to the pur-
chase method of accounting used for business combinations. In
the financial instruments project, FASB is considering whether
certain financial instruments should be classified as equity or
liabilities on the balance sheet. FASB plans to issue a limited
scope statement in 2003. In December 2002, FASB decided to
broaden the scope of this project to include development of
guidance related to measuring the fair value of financial instru-
ments. The fair value measurement guidance developed in this
project would supersede existing guidance. In establishing its
revenue recognition project, FASB recognized that no compre-
hensive standard on revenue recognition exists. FASB plans
to issue exposure drafts on a comprehensive accounting stan-
dard on revenue recognition and related amendments of its
concepts statements in mid-2004 and to finalize the standard
and related amendments in 2005. In its project concerned with
the purchase method of accounting for business combinations,
FASB’s deliberations are expected to consider the following:
how to measure the fair value of the exchange; recognition and
measurement of acquired assets and assumed liabilities, includ-
ing pre-acquisition contingencies; and issues related to non-
controlling interests. Until new standards have been finalized
and issued by FASB, Dominion cannot determine the impact
on the reporting of its operations that may result from any such
future changes.
62 Dominion ’02 Annual Report