Dominion Power 2003 Annual Report Download - page 88

86.Dominion 2003
Notes to Consolidated Financial Statements, Continued
Lease Commitments
Dominion leases various facilities, vehicles, and equipment under
both operating and capital leases. Future minimum lease pay-
ments under noncancellable operating and capital leases that
have initial or remaining lease terms in excess of one year as of
December 31, 2003 are as follows (in millions):
2004 2005 2006 2007 2008 Thereafter Total
$70 $55 $40 $34 $26 $57 $282
Rental expense included in other operations and maintenance
expense was $95 million, $84 million and $75 million for 2003,
2002, and 2001, respectively. Beginning in 2004, approximately
$25 million will be recognized annually as interest expense associ-
ated with the debt obligations of newly consolidated VIEs resulting
from the adoption of FIN 46R.
As of December 31, 2003, Dominion was party to an agree-
ment 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
million was advanced to the lessor by Dominion. This project is
expected to be completed in 2004 and will result in estimated
annual lease commitments 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 oper-
ating 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 the project over to the lessor.
Environmental Matters
Dominion is subject to costs resulting from a steadily increasing
number of federal, state and local laws and regulations designed
to protect human health and the environment. These laws and
regulations can result in increased capital, operating and other
costs as a result of compliance, remediation, containment and
monitoring obligations.
Historically, Dominion recovered such costs arising from regu-
lated electric operations through utility rates. However, to the
extent environmental costs are incurred in connection with opera-
tions regulated by the Virginia State Corporation Commission
during the period ending June 30, 2007, in excess of the level
currently included in Virginia jurisdictional rates, Dominion’s
results of operations will decrease. After that date, Dominion may
seek recovery through rates of only those environmental costs
related to transmission and distribution operations.
Superfund Sites From time to time, Dominion may be identi-
fied as a potentially responsible party to a Superfund site. The
Environmental Protection Agency (EPA)(or a state) can either
(a) allow such a party to conduct and pay for a remedial investi-
gation, feasibility study and remedial action or (b) conduct the
remedial investigation and action and then seek reimbursement
from the parties. Each party can be held jointly, severally and
strictly liable for all costs. These parties can also bring contribu-
tion actions against each other and seek reimbursement from
their insurance companies. As a result, Dominion may be respon-
sible for the costs of remedial investigation and actions under the
Superfund Act or other laws or regulations regarding the remedi-
ation of waste. Dominion does not believe that any currently
identified sites will result in significant liabilities.
In 1987, the EPA identified Dominion and a number of other
entities as Potentially Responsible Parties (PRPs) at two Superfund
sites located in Kentucky and Pennsylvania. On October 6,
2003, the EPA issued its Certificate of Completion of remediation
for the Kentucky site. Future costs for the Kentucky site will be lim-
ited to minor operations and maintenance expenditures. Remedi-
ation design is ongoing for the Pennsylvania site, and total
remediation costs are expected to be in the range of $13 million
to $25 million. Based on allocation formulas and the volume of
waste shipped to the site, Dominion has accrued a reserve of
$2 million to meet its obligations at these two sites. Based on a
financial assessment of the PRPs involved at these sites, Dominion
has determined that it is probable that the PRPs will fully pay their
share of the costs. Dominion generally seeks to recover its costs
associated with environmental remediation from third party insur-
ers. At December 31, 2003, any pending or possible claims were
not recognized as an asset or offset against such obligations.
Other EPA Matters In relation to a Notice of Violation
received by Virginia Power in 2000 from the EPA and related
proceedings, Virginia Power, the U.S. Department of Justice, the
EPA, and the states of Virginia, West Virginia, Connecticut, New
Jersey and New York agreed to a settlement in April 2003 in the
form of a proposed Consent Decree. The Virginia federal district
court entered the final Consent Decree in October 2003, resolv-
ing the underlying actions. Under the settlement, Virginia Power
paid a $5 million civil penalty, agreed to fund $14 million for
environmental projects and committed to improve air quality
under the Consent Decree estimated to involve expenditures of
$1.2 billion. Dominion has already incurred certain capital
expenditures for environmental improvements at its coal-fired sta-
tions in Virginia and West Virginia and has committed to addi-
tional measures in its current financial plans and capital budget
to satisfy the requirements of the Consent Decree. As of Decem-
ber 31, 2003, Dominion had recognized a provision for the fund-
ing of the environmental projects, substantially all of which was
recorded in 2000.