Dominion Power 2004 Annual Report Download - page 70

Notes to Consolidated Financial Statements, Continued
potential VIEs, if sufficient information is ultimately obtained. Dominion
has remaining purchase commitments with these six potential VIE supplier
entities of $2.6 billion at December 31, 2004. These commitments are incor-
porated in Dominion’s disclosure of unconditional purchase obligations
included in Note 22. Dominion paid $249 million, $250 million and
$300 million for electric generation capacity and $185 million, $168 million
and $120 million for electric energy to these entities in 2004, 2003 and
2002, respectively. Dominion’s exposure to losses from its involvement with
these entities cannot be determined since losses, if any, would be repre-
sented by either: 1) the difference between (a) the amount payable by
Dominion for energy and capacity under the long-term contract and (b)
amounts recoverable through sales to retail electric customers in its ser-
vice territory or wholesale market transactions; or 2) if the potential VIE
supplier fails to perform, any amount paid by Dominion to obtain replace-
ment energy and capacity in excess of the amounts otherwise payable
under the long-term contract with the potential VIE supplier entity.
The EITF has added a project to its agenda to consider what variability
should be considered when determining whether an interest is a variable
interest. It is uncertain how this EITF project or other future efforts to fur-
ther interpret FIN 46R could impact Dominion’s conclusions based on its
use of information received.
EITF 04-8
On December 31, 2004, Dominion adopted EITF Issue No. 04-8,
The Effect
of Contingently Convertible Instruments on Diluted Earnings per Share
,
which requires the shares issuable under contingently convertible instru-
ments to be included in the diluted EPS calculation regardless of whether
the market price trigger (or other contingent feature) has been met. Prior to
adoption, Dominion exchanged $219 million of outstanding contingent con-
vertible senior notes for new notes with a conversion feature that requires
that the principal amount of each note be repaid in cash. The new notes
outstanding on December 31, 2004 were included in the diluted EPS calcu-
lation retroactive to the date of issuance using the method described in
EITF 04-8. Under this method, the number of shares included in the denomi-
nator of the diluted EPS calculation is calculated as the net shares issuable
for the reporting period based upon the average market price for the
period. This did not result in an increase to the average shares outstanding
used in the calculation of Dominion’s diluted EPS since the conversion price
included in the notes was greater than the average market price.
SAB 106
In September 2004, the SEC issued SAB 106, which provides guidance to oil
and gas companies following the full cost accounting method regarding the
application of SFAS No. 143. SAB 106 requires companies calculating the
full cost ceiling test to exclude future cash outflows associated with set-
tling AROs that have been accrued on the balance sheet as required by
SFAS No. 143. However, estimated dismantlement and abandonment costs
related to future development activities, which are not required to be
accrued under SFAS No. 143, should continue to be included in the full cost
ceiling test. Dominion adopted the provisions of SAB 106 during the fourth
quarter of 2004. There was no financial statement impact associated with
the adoption of SAB 106.
2003
SFAS No. 143
Effective January 1, 2003, Dominion adopted SFAS No. 143, which provides
accounting requirements for the recognition and measurement of liabilities
associated with the retirement of tangible long-lived assets. The effect of
adopting SFAS No. 143 for 2003, as compared to an estimate of net income
reflecting the continuation of former accounting policies, was to increase
net income by $201 million. The increase is comprised of a $180 million
after-tax gain, representing the cumulative effect of a change in accounting
principle and an increase in income before the cumulative effect of a
change in accounting principle of $21 million.
EITF 02-3
On January 1, 2003, Dominion adopted EITF Issue No. 02-3,
Issues Involved
in Accounting for Derivative Contracts Held for Trading Purposes and Con-
tracts Involved in Energy Trading and Risk Management Activities
, that
rescinded EITF Issue No. 98-10,
Accounting for Contracts Involved in Energy
Trading and Risk Management Activities
. Adopting EITF 02-3 resulted in
the discontinuance of fair value accounting for non-derivative contracts
held for trading purposes. Those contracts are recognized as revenue or
expense at the time of contract performance, settlement or termination.
The EITF 98-10 rescission was effective for non-derivative energy trading
contracts initiated after October 25, 2002. For all non-derivative energy
trading contracts initiated prior to October 25, 2002, Dominion recognized a
loss of $67 million (after taxes of $43 million) as the cumulative effect of
this change in accounting principle on January 1, 2003.
EITF 03-11
Dominion adopted 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
, on
October 1, 2003. EITF 03-11 addresses classification of income statement
related amounts for derivative contracts. Income statement amounts
related to periods prior to October 1, 2003 are presented as originally
reported. See Note 2.
Statement 133 Implementation Issue No. C20
In connection with a request to reconsider an interpretation of SFAS No.
133,
Accounting for Derivative Instruments and Hedging Activities , FASB
issued Statement 133 Implementation Issue No. C20,
Interpretation of the
Meaning of ‘Not Clearly and Closely Related’ in Paragraph 10 (b) regarding
Contracts with a Price Adjustment Feature
. Issue C20 establishes criteria
for determining whether a contract’s pricing terms that contain broad mar-
ket indices (e.g., the consumer price index) could qualify as a normal pur-
chase or sale and, therefore, not be subject to fair value accounting.
Dominion has several contracts that qualify as normal purchase and sales
contracts under the Issue C20 guidance. However, the adoption of Issue
C20 required the contracts to be initially recorded at fair value as of Octo-
ber 1, 2003, resulting in the recognition of an after-tax charge of $75 mil-
lion, representing the cumulative effect of the change in accounting
principle. As normal purchase and sales contracts, no further changes in
fair value will be recognized.
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