Dominion Power 2003 Annual Report Download - page 87

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85.Dominion 2003
Dominion determines the expected long-term rates of return on
plan assets for pension plans and other postretirement benefit
plans by using a combination of:
• Historical return analysis to determine expected future risk
premiums;
• Forward looking return expectations derived from the yield on
long-term bonds and the price earnings ratios of major stock mar-
ket indices;
• Expected inflation and risk-free interest rate assumptions; and
• The types of investments expected to be held by the plans.
Assisted by an independent actuary, management develops
assumptions, which are then compared to the forecasts of other
independent investment advisors to ensure reasonableness. An
internal committee selects the final assumptions.
Discount rates are determined from analyses performed by a
third party actuarial firm of AA/Aa rated bonds with cash flows
matching the expected payments to be made under Dominion’s
plans.
Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plans. A one-percent-
age-point change in assumed health care cost trend rates would
have the following effects:
Other Postretirement Benefits
One One
percentage percentage
point point
increase decrease
(millions)
Effect on total service and interest cost
components for 2003 $ 22 $ (18)
Effect on postretirement benefit obligation
at December 31, 2003 $182 $(148)
In addition, Dominion sponsors defined contribution thrift-type
savings plans. During 2003, 2002 and 2001, Dominion recog-
nized $27 million, $26 million and $27 million, respectively, as
contributions to these plans.
Certain regulatory authorities have held that amounts recov-
ered in utility customers’ rates for other postretirement benefits,
in excess of benefits actually paid during the year, must be
deposited in trust funds dedicated for the sole purpose of paying
such benefits. Accordingly, certain subsidiaries fund postretirement
benefit costs through Voluntary Employees’ Beneficiary Associa-
tions. The remaining subsidiaries do not prefund postretirement
benefit costs but instead pay claims as presented.
23. Commitments and
Contingencies
As the result of issues generated in the ordinary course of busi-
ness, Dominion and its subsidiaries are involved in legal, tax and
regulatory proceedings before various courts, regulatory commis-
sions and governmental agencies, some of which involve sub-
stantial amounts of money. Management believes that the final
disposition of these proceedings will not have a material effect
on its financial position, liquidity or results of operations.
Long-Term Purchase Contracts
Presented below is a summary of Dominion’s commitments as of
December 31, 2003 under long-term term, fixed quantity, fixed
price purchase contracts:
2004 2005 2006 2007 2008 Thereafter Total
(millions)
Purchased
electric
capacity(1) $589 $584 $571 $547 $516 $4,176 $6,983
Production
handling for
gas and oil
production
operations 44 59 58 53 36 43 293
(1) Reflects Dominion’s minimum commitments to purchase capacity from other
utilities, qualifying facilities and independent power producers under contracts
for electric generation. At December 31, 2003, the present value of the total
commitment is $4.2 billion. Capacity payments under these contracts totaled
$611 million, $661 million and $668 million for 2003, 2002, and 2001,
respectively.
In 2003, Dominion paid $154 million for the purchase of a
generating facility and the termination of two long-term power
purchase contracts with non-utility generators. Dominion recorded
the generating facility at its estimated fair value of $49 million
and recorded an after-tax charge of $65 million for the termina-
tion of the power purchase contracts. In 2001, Dominion com-
pleted the purchase of three generating facilities and the
termination of seven long-term power purchase contracts with
non-utility generators. Dominion paid $207 million for the gener-
ating facilities and these contracts and recorded an after-tax
charge of $136 million. The allocation of the purchase price
was assigned to the assets and liabilities acquired based upon
estimated fair values as of the date of acquisition.