Dominion Power 2003 Annual Report Download - page 30

28.Dominion 2003
Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
mates used by Dominion are based on relevant information avail-
able at the time the estimates are made. However, estimates of
future cash flows are highly uncertain by nature and may vary
significantly from actual results.
The underlying assumptions and estimates involved in prepar-
ing these fair value calculations could change significantly from
period to period. Modifications to any of these assumptions, par-
ticularly changes in discount rates and changes in growth rates
inherent in management’s estimate of future cash flows, could
result in a future impairment of goodwill.
Substantially all of Dominion’s goodwill is allocated to its Gen-
eration, Energy, Delivery and Exploration & Production reporting
units. If the estimates of future cash flows used in the 2003 annual
test had been 10% lower, the resulting discounted cash flows
would have been greater than the carrying values of each of those
reporting units, still indicating no impairment was present.
Use of estimates in long-lived asset impairment testing
Impairment testing for long-lived assets and intangible assets with
definite lives is required when circumstances indicate those assets
may be impaired. In performing the impairment test, Dominion
would estimate the future cash flows associated with individual
assets or groups of assets. Impairment must be recognized when
the undiscounted estimated future cash flows are less than the
related asset’s carrying amount. In those circumstances, the asset
must be written down to its fair value, which, in the absence of
market price information, may be estimated as the present value
of its expected future net cash flows, using an appropriate dis-
count rate. Although cash flow estimates used by Dominion are
based on relevant information available at the time the estimates
are made, estimates of future cash flows are, by nature, highly
uncertain and may vary significantly from actual results.
In 2003, reflecting a significant revision in long-term expecta-
tions for potential growth in telecommunications service revenue,
Dominion approved a strategy to sell its interest in the telecommu-
nications business. In connection with this change in strategy,
Dominion tested the network assets to be sold for impairment,
using the revised long-term expectations for potential growth.
Dominion’s assets were determined to be substantially impaired
and were written down to fair value.
Asset retirement obligations
Dominion recognizes liabilities for the expected cost of retiring
tangible long-lived assets for which a legal obligation exists.
These asset retirement obligations (AROs) are recognized at fair
value as incurred, and are capitalized as part of the cost of the
related tangible long-lived assets. In the absence of quoted mar-
ket prices, Dominion estimates the fair value of its AROs using
present value techniques, in which estimates of future cash flows
associated with retirement activities are discounted using its
credit-adjusted risk free rate. AROs currently reported on
Dominion’s Consolidated Balance Sheet were measured during a
period of historically low interest rates. The impact on measure-
ments of new AROs, using different rates in the future, may be
significant.
A significant portion of Dominion’s AROs relates to the future
decommissioning of its nuclear facilities. At December 31, 2003,
nuclear decommissioning AROs totaled $1.3 billion, which repre-
sented approximately 80% of Dominion’s total AROs. Based on
their significance, the following discussion of critical assumptions
inherent in determining the fair value of AROs relates to those
associated with Dominion’s nuclear decommissioning obligations.
Dominion obtains from third-party experts periodic site-spe-
cific “base year” cost studies in order to estimate the nature,
cost and timing of planned decommissioning activities for its
utility nuclear plants. Dominion uses internal cost studies for
its merchant nuclear facility based on similar methods. These
cost studies are based on relevant information available at the
time they are performed; however, estimates of future cash
flows for extended periods are by nature highly uncertain and
may vary significantly from actual results. In addition, these cost
estimates are dependent on subjective factors, including the
selection of cost escalation rates, which Dominion considers to
be a critical assumption.
Dominion determines cost escalation rates, which represent
projected cost increases over time, due to both general inflation
and increases in the cost of specific decommissioning activities,
for each of its nuclear facilities. The weighted average cost esca-
lation used by Dominion was 3.18%. The use of alternative rates
would have been material to the liabilities recognized. For exam-
ple, had Dominion increased the cost escalation rate by 0.5% to
3.68%, the amount recognized as of December 31, 2003 for its
AROs related to nuclear decommissioning would have been
$256 million higher.
Employee benefit plans
Dominion sponsors noncontributory defined benefit pension plans
and other postretirement benefit plans for eligible active employ-
ees, retirees and qualifying dependents. The costs of providing
benefits under these plans are dependent, in part, on historical
information such as employee demographics, the level of contri-
butions made to the plans and earnings on plan assets. Assump-
tions about the future, including the expected rate of return on
plan assets, discount rates applied to benefit obligations, rate of
compensation increase and the anticipated rate of increase in
health care costs, also have a significant impact on employee
benefit costs. The impact on pension and other postretirement
benefit plan obligations associated with changes in these factors
is generally recognized in the Consolidated Statements of Income
over the remaining average service period of plan participants
rather than immediately.