Dominion Power 2004 Annual Report Download - page 33

D 2004/Page 31
FIN 46R
The adoption of Financial Accounting Standards Board (FASB) Interpreta-
tion No. 46 (revised December 2003),
Consolidation of Variable Interest
Entities,
(FIN 46R) on December 31, 2003 with respect to special purpose
entities, affected the comparability of Dominion’s 2004 Consolidated State-
ment of Income to prior years as follows:
•Dominion was required to consolidate certain variable interest lessor
entities through which Dominion had financed and leased several new
power generation projects, as well as its corporate headquarters and
aircraft. As a result, the Consolidated Balance Sheet as of December
31, 2003 reflects an additional $644 million in net property, plant and
equipment and deferred charges and $688 million of related debt. In
2004, Dominion’s Consolidated Statement of Income reflects deprecia-
tion expense on the net property, plant and equipment and interest
expense on the debt associated with these entities, whereas in prior
years it reflected as rent expense in other operations and maintenance
expense, the lease payments to these entities.
•In addition, under FIN 46R, Dominion reports as long-term debt its junior
subordinated notes held by five capital trusts, rather than the trust pre-
ferred securities issued by those trusts. As a result, in 2004 Dominion
reported interest expense on the junior subordinated notes rather than
preferred distribution expense on the trust preferred securities.
SFAS No. 143
Adopting Statement of Financial Accounting Standards (SFAS) No. 143,
Accounting for Asset Retirement Obligations , on January 1, 2003, affected
the comparability of Dominion’s 2004 and 2003 Consolidated Statements of
Income to the prior year as follows:
•Accretion of the AROs, including nuclear decommissioning, is reported
in other operations and maintenance expense. Previously, expenses
associated with the provision for nuclear decommissioning were
reported in depreciation expense and in other income (loss); and
•Realized and unrealized earnings of trusts available for funding decom-
missioning activities at Dominion’s utility nuclear plants are recorded in
other income (loss) and AOCI, as appropriate. Previously, as permitted
by regulatory authorities, these earnings, along with an offsetting
charge to expense, for the accretion of the decommissioning liability,
were both reported in other income (loss).
EITF 02-3 and EITF 03-11
The adoption of Emerging Issues Task Force (EITF) Issue No. 02-3, Issues
Involved in Accounting for Derivative Contracts Held for Trading Purposes
and Contracts Involved in Energy Trading and Risk Management Activities,
and related EITF Issue No. 03-11, Reporting Realized Gains and Losses on
Derivative Instruments That Are Subject to FASB Statement No. 133 and
Not “Held for Trading Purposes” as Defined in Issue No. 02-3
, changed the
timing of recognition in earnings for certain Clearinghouse energy-related
contracts, as well as the financial statement presentation of gains and
losses associated with energy-related contracts. The Consolidated State-
ment of Income for 2002 was not restated. Prior to 2003, all energy trading
contracts, including non-derivative contracts, were recorded at fair
value with changes in fair value and settlements reported in revenue on
a net basis. Specifically, adopting EITF 02-3 and EITF 03-11 affected the
comparability of Dominion’s 2004 and 2003 Consolidated Statements of
Income to the prior year as follows:
•For derivative contracts not held for trading purposes that involve phys-
ical delivery of commodities, unrealized gains and losses and settle-
ments on sales contracts are presented in revenue, while unrealized
gains and losses and settlements on purchase contracts are reported in
expenses; and
•Non-derivative energy-related contracts, previously subject to fair
value accounting under prior accounting guidance, are recognized as
revenue or expense on a gross basis at the time of contract perfor-
mance, settlement or termination.
Other
Dominion enters into buy/sell and related agreements as a means to repo-
sition its offshore Gulf of Mexico crude oil production to more liquid mar-
keting locations onshore. Dominion typically enters into either a single or a
series of buy/sell transactions in which it sells its crude oil production at
the offshore field delivery point and buys similar quantities at Cushing,
Oklahoma for sale to third parties. Dominion is able to enhance profitability
by selling to a wide array of refiners and/or trading companies at Cushing,
one of the largest crude oil markets in the world, versus restricting sales to
a limited number of refinery purchasers in the Gulf of Mexico. These trans-
actions require physical delivery of the crude oil and the risks and rewards
of ownership are evidenced by title transfer, assumption of environmental
risk, transportation scheduling and counter party nonperformance risk.
Under the primary guidance of EITF Issue No. 99-19,
Reporting Revenue
Gross as a Principal versus Net as an Agent
, Dominion presents the sales
and purchases related to its crude oil buy/sell arrangements on a gross
basis in its Consolidated Statements of Income. The EITF is currently dis-
cussing Issue No. 04-13,
Accounting for Purchases and Sales of Inventory
with the Same Counterparty
, which specifically focuses on purchase and
sale transactions made pursuant to crude oil buy/sell arrangements. The
EITF is evaluating whether these types of transactions should be presented
net in the Consolidated Statements of Income. While resolution of this
issue may affect the income statement presentation of these revenues and
expenses, there would be no impact on Dominion’s results of operations or
cash flows. The portion of Dominion’s operating revenue related to buy/sell
activity for the years 2004, 2003, and 2002 was 2.1%, 1.5%, and 1.6% respec-
tively. Reported production volumes are not impacted, as only the initial
sale of Dominion’s production is included in reported production volumes. It
is estimated that approximately 55% of Dominion’s 2004 oil production was
marketed through the use of one or more crude oil buy/sell agreements.
See Note 2 to the Consolidated Financial Statements.