Dominion Power 2003 Annual Report Download - page 71

69.Dominion 2003
The following table presents selected information related to
cash flow hedges included in AOCI in the Consolidated Balance
Sheet at December 31, 2003:
Portion
Expected to
Accumulated be Reclassified
Other to Earnings
Comprehensive during
Income (Loss) the Next Maximum
After Tax 12 Months Term
(millions)
Commodities:
Gas $(590) $(257) 50 months
Oil (82) (40) 36 months
Electricity (107) (66) 48 months
Interest Rate (25)
— 270 months
Foreign Currency 36 4 47 months
Total $(768) $(359)
The actual amounts that will be reclassified to earnings in
2004 will vary from the expected amounts presented above as a
result of changes in market prices, interest rates and foreign
exchange rates. The effect of amounts being reclassified from
AOCI to earnings will generally be offset by the recognition of
the hedged transactions (e.g., anticipated sales) in earnings,
thereby achieving the realization of prices contemplated by the
underlying risk management strategies.
In connection with the December 2, 2001 Enron bankruptcy fil-
ing, Dominion’s Enron derivatives designated as cash flow hedges
of anticipated purchases and sales of natural gas no longer quali-
fied for hedge accounting and, accordingly, were de-designated
from their hedging relationships for accounting purposes.
9. Discontinued Operations —
Telecommunications Operations
Dominion Fiber Ventures, LLC (DFV) is a joint venture originally
formed by Dominion and a third-party investor trust (Investor
Trust) to fund the development of its principal subsidiary, Domin-
ion Telecom, Inc. (DTI). DTI is a facilities-based interchange and
emerging local carrier, providing broadband solutions to whole-
sale customers throughout the eastern United States. In connec-
tion with its formation, DFV issued $665 million of 7.05% senior
secured notes due March 2005 which were secured in part by
Dominion convertible preferred stock held in trust. Dominion is
the beneficial owner of the trust and thus does not present the
convertible preferred stock in its Consolidated Balance Sheets.
Also, as described below, Dominion acquired substantially all of
DFV’s senior notes in early 2003, reducing the likelihood that the
remarketing of the Dominion convertible preferred stock held in
trust would ever occur.
At inception, Dominion’s strategy for DTI was to focus primar-
ily on delivering lit capacity, dark fiber and collocation services
to under-served markets. With the markets for these services not
growing at rates originally contemplated and the continuing
downward pressure on prices, resulting from excess capacity in
the telecommunications industry, Dominion reconsidered its
investment strategy during 2003. Reflecting a revision in long-
term expectations for potential growth in telecommunications ser-
vice revenue, Dominion approved a strategy to sell its interest in
the telecommunications business and does not expect to have
any significant participation in the business once sold. Dominion
has engaged outside parties to assist in marketing DTI and
expects a sale to occur in 2004.
As a result, DTI’s assets (network assets and inventories) and
liabilities, both totaling $13 million are classified as held-for-sale,
and are included in other current assets and liabilities on the
Consolidated Balance Sheet as of December 31, 2003. DTI’s
results of operations, including revenue of $11 million, operating
expenses of $638 million and income tax expense of $15 million,
are presented as discontinued operations, on a net basis, on the
Consolidated Statement of Income for 2003. Dominion has guar-
antees related to DTI in the amount of $17 million. In addition,
bidders may choose not to acquire all of the operating leases of
DTI which may ultimately be abandoned.
2003
— Asset Impairments
The change in strategy in 2003 included a review of DTI’s network
assets and related inventories for impairment. As a result, Domin-
ion recognized a $566 million impairment of network assets and
related inventories, reflecting the excess of the assets carrying
amount over their estimated fair values. This amount included the
allocation of $16 million to the Investor Trust, representing its
minority interest share of these charges. Management determined
the estimated fair values with the assistance of an independent
appraiser and subsequently updated the fair values based on
preliminary bids received in connection with the sale of DTI.
Since realization of tax benefits related to the impairment
charges will be dependent upon Dominion’s future tax profile and
taxable earnings, management established a valuation allow-
ance that completely offsets the deferred tax benefits. In addition,
Dominion increased the valuation allowance on deferred tax
assets previously recognized, resulting in a $48 million increase
in deferred income tax expense.
2003
— Additional Investments in DFV
The DFV senior notes contained certain stock price and credit
downgrade triggers that could have resulted in the issuance of
the convertible preferred stock held in trust. In the first quarter of
2003, Dominion purchased $633 million of DFV senior notes
and, in connection with the purchase, obtained consent to
remove the triggers from the indenture. Dominion paid a total of
$664 million for the notes acquired and recognized a pre-tax
charge of $57 million, reported in other expenses on the