Dominion Power 2003 Annual Report Download - page 46

44.Dominion 2003
Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Dominion’s planned capital expenditures during 2004 are
expected to total approximately $2.4 billion. For 2005, planned
capital expenditures are expected to range from $2.4 billion to
$2.6 billion. These expenditures include construction and expan-
sion of generation facilities, environmental upgrades, construc-
tion improvements and expansion of gas and electric
transmission and distribution assets, purchases of nuclear fuel
and expenditures to explore for and develop natural gas and oil
properties. Dominion expects to fund its capital expenditures with
cash from operations, and a combination of sales of securities
and short-term borrowings.
Dominion may choose to postpone or cancel certain planned
capital expenditures, to the extent they are not fully covered by
operating cash flows. Dominion would do this in order to mitigate
the need for future debt financings, beyond those needed to
cover normal maturities and redemptions.
Use of Off-Balance Sheet Arrangements
Leasing Arrangements
As of December 31, 2003, Dominion was party to an agreement
with a voting interest entity (lessor) in order to construct and lease
a new power generation project in Pennsylvania. Project costs
totaled $695 million at December 31, 2003 of which $624 mil-
lion was advanced to the lessor by Dominion. Dominion expects
to be repaid during 2004. This project is expected to be com-
pleted in 2004 and will result in estimated annual lease commit-
ments of approximately $58 million. A lease agreement has not
yet been executed for this project, however, Dominion expects
that, once executed, it will qualify as an operating lease.
Dominion has been appointed to act as the construction agent
for the lessor and controls the design and construction of the facil-
ity. Dominion, in this role, is responsible for completing construc-
tion by a specified date. In the event a project is terminated
before completion, Dominion has the option to either purchase
the project for 100% of project costs plus fees or terminate the
project and turn it over to the lessor.
Benefits of this arrangement include:
•Certain tax benefits as Dominion would be considered the
owner of the leased property for tax purposes. As a result, it
would be entitled to tax deductions for depreciation not recog-
nized for financial accounting purposes and
•As an operating lease for financial accounting purposes, the
asset and related borrowings used to finance the construction of
the asset would not be included on Dominion’s Consolidated Bal-
ance Sheets. Although this improves measures of leverage calcu-
lated using amounts reported in Dominion’s Consolidated
Financial Statements, credit rating agencies view lease obliga-
tions as debt equivalents in evaluating Dominion’s credit profile.
Securitizations of Mortgages and Loans
As of December 31, 2003, Dominion held $413 million of
retained interests from securitizations of mortgage and commer-
cial loans completed in prior years. Dominion did not securitize
or originate any loans in 2003. Investors in the securitization
trusts have no recourse to Dominion’s other assets for failure of
debtors to repay principal and interest on the underlying loans
when due. Therefore, Dominion’s exposure to any future losses
from this activity is limited to its investment in retained interests.
Future Issues and Other Matters
Status of Deregulation in Virginia
The Virginia Electric Utility Restructuring Act (the Virginia Restruc-
turing Act), enacted in 1999, established a plan to restructure the
electric utility industry in Virginia. The Virginia Restructuring Act
addressed among other things: capped base rates, participation
in a regional transmission organization (RTO), retail choice and
the recovery of stranded costs. Dominion made retail choice
available to all of its Virginia regulated electric customers as of
January 1, 2003.
Base Rates
Under the Virginia Restructuring Act, the generation portion of
Dominion’s Virginia jurisdictional operations is no longer subject
to cost-based rate regulation. Dominion’s base rates (excluding
fuel costs and certain other allowable adjustments) will remain
capped until July 2007, unless modified or terminated sooner
under the Virginia Restructuring Act. Recovery of generation-
related costs will continue through capped rates, and, where
applicable, a wires charge assessed on those customers opting
for alternative suppliers. Additionally, the Virginia Restructuring
Act provides that after the end of the capped rate period, any
default service provided by Dominion will be based upon
competitive market prices for electric generation services.
In January 2004, legislation supported by the Offices of the
Governor and the Attorney General of Virginia was submitted to
the Virginia General Assembly that would extend the capped
base rates by three and one-half years, through December 31,
2010. The bill was supported by Dominion and was approved by
the Virginia Senate in late January 2004. In addition to extend-
ing capped rates, the bill would:
• Lock in Dominion’s fuel factor until the earlier of July 1, 2007
or the termination of capped rates through Virginia Commission
order;
• Provide for a one-time adjustment of Dominion’s fuel factor,
effective July 1, 2007 through December 31, 2010, with no adjust-
ment for previously incurred over-recovery or under-recovery of
fuel costs and thus would eliminate deferred fuel accounting and
• End wires charges on the earlier of July 1, 2007, or the termi-
nation of capped rates, consistent with the Virginia Restructuring
Act’s original timetable.