Dominion Power 2004 Annual Report Download - page 69

Merchant Nuclear Plant — Dominion recognized, as a liability on the
Consolidated Balance Sheet, an obligation to decommission its merchant
nuclear plant. The obligation was based upon its estimated fair value,
using discounted cash flows of expected costs to perform the decommis-
sioning activities. Accretion of the obligation was reported as depreciation
expense. The external trusts were accounted for as available-for-sale
investments with realized gains and losses recognized in other income
(loss) and unrealized gains and losses reported in AOCI.
Gas and Oil Dismantlement and Abandonment Costs
— 2002
Prior to 2003, Dominion’s accounting and reporting practices for future dis-
mantlement and restoration activities for its gas and oil wells and plat-
forms recognized such costs as a component of depletion expense and
included them in accumulated depreciation, depletion and amortization.
Amortization of Debt Issuance Costs
Dominion defers and amortizes debt issuance costs and debt premiums or
discounts over the expected lives of the respective debt issues, considering
maturity dates and, if applicable, redemption rights held by others. As per-
mitted by regulatory authorities, gains or losses resulting from the refi-
nancing of debt allocable to utility operations subject to cost-based rate
regulation have also been deferred and amortized over the lives of the
new issues.
3. Newly Adopted Accounting Standards
2004
FSP FAS 142-2
Dominion adopted Financial Accounting Standards Board (FASB) Staff
Position 142-2, Application of FASB Statement No. 142, Goodwill and Other
Intangible Assets, to Oil- and Gas-Producing Entities,
(FSP 142-2) in
September 2004. FSP 142-2 was issued to clarify that an exception outlined
in SFAS No. 142 includes the balance sheet classification of drilling and
mineral rights of oil and gas producing entities. In accordance with the guid-
ance in FSP 142-2, Dominion continues to present its oil and gas drilling
rights as tangible assets classified in property, plant and equipment.
FIN 46R
Dominion adopted FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities , (FIN 46R) for its interests in VIEs
that are not considered special purpose entities on March 31, 2004. As dis-
cussed below, Dominion adopted FIN 46R for its interests in special pur-
pose entities on December 31, 2003. FIN 46R addresses the identification
and consolidation of VIEs, which are entities that are not controllable
through voting interests or in which the VIEs’ equity investors do not bear
the residual economic risks and rewards in proportion to voting rights.
There was no impact on Dominion’s results of operations or financial posi-
tion related to this adoption.
Dominion is a party to long-term contracts for purchases of electric
generation capacity and energy from qualifying facilities and independent
power producers. Certain variable pricing terms in some of these contracts
cause them to be considered potential variable interests that require evalu-
ation under the provisions of FIN 46R. If a power generator that holds one
of these specific types of contracts is determined to be a VIE and Dominion
is determined to be the primary beneficiary, Dominion would be required to
consolidate the entity in its financial statements. Consolidation of one of
these potential VIEs would primarily result in the addition of property, plant
and equipment, long-term debt and minority interest to Dominion’s Consoli-
dated Balance Sheets. The impact on Dominion’s Consolidated Statements
of Income would be that purchased energy and capacity expenses attribut-
able to the long-term contract with the VIE would be replaced by the VIE’s
operations, maintenance and interest expenses. The VIE’s results of opera-
tions would be reported as income attributable to a minority interest, and
would not affect Dominion’s net income. The debt of these potential VIEs,
even if included in Dominion’s Consolidated Balance Sheets, would be non-
recourse to Dominion.
At March 31, 2004, Dominion had determined that its power purchase
agreements with ten of these entities would require further analysis under
FIN 46R. Each of these facilities began commercial operations and service
to Dominion under the long-term contracts prior to December 31, 2003. Since
these entities were established and are legally owned by parties not affili-
ated with Dominion, Dominion submitted requests for information needed
to evaluate the entity and its contractual relationship with the entity under
FIN 46R. In addition, Dominion informed the entities that, if the results of its
evaluation were to indicate that Dominion should consolidate the entity, it
would also require periodic financial information in order to perform the
accounting required to consolidate the entity in its financial statements.
The objectives of the FIN 46R evaluation are to determine: (1) whether
Dominion’s interest, represented by the power purchase contract, is a signif-
icant variable interest; (2) whether the supplier entity is a VIE; and (3) if the
supplier entity is a VIE, whether Dominion is the primary beneficiary.
In response to these requests, five of the potential VIE supplier entities
provided some, but limited, information. After completing its analysis of
this information, Dominion concluded that one of the supplier entities is a
VIE, its power purchase contract represented a significant variable interest
in the VIE, but Dominion is not its primary beneficiary. In addition, using the
limited information received, Dominion concluded that it does not hold sig-
nificant variable interests in two of the potential VIE supplier entities.
Since the enactment of the Virginia Restructuring Act, Dominion has
sought to renegotiate or terminate long-term power purchase contracts in
its efforts to reduce the cost structure of its generation-related operations.
In November 2004, Dominion paid $92 million to terminate its power pur-
chase agreement and to acquire the related generating facility from one of
the potential VIE suppliers that had not provided information in response to
Dominion’s FIN 46R request. Dominion had purchased $20 million, $20 mil-
lion and $21 million of electric generation capacity and $4 million, $7 mil-
lion and $3 million of electric energy under this power purchase agreement
in 2004, 2003 and 2002, respectively. In addition, in February 2005,
Dominion paid $42 million in cash and assumed $62 million of debt to ter-
minate its power purchase agreement and to acquire the related generat-
ing facility from the supplier entity that Dominion had determined to be a
VIE and, in which, its power purchase agreement represented a significant
variable interest. Dominion purchased $23 million, $23 million and $24 mil-
lion of electric generation capacity and $8 million, $10 million and $5 mil-
lion of electric energy under this power purchase agreement in 2004, 2003
and 2002, respectively.
For those six potential VIE supplier entities that have not provided suffi-
cient information, Dominion will continue its efforts to obtain information
and will complete an evaluation of its relationship with each of these
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