Dominion Power 2004 Annual Report Download - page 74

Notes to Consolidated Financial Statements, Continued
The actual amounts that will be reclassified to earnings in 2005 will
vary from the expected amounts presented above as a result of changes in
market prices, interest rates and foreign exchange rates. The effect of
amounts being reclassified from accumulated other comprehensive loss to
earnings will generally be offset by the recognition of the hedged transac-
tions (e.g., anticipated sales) in earnings, thereby achieving the realization
of prices contemplated by the underlying risk management strategies.
As a result of damage to certain offshore production facilities in the
Gulf of Mexico caused by Hurricane Ivan, and the related loss of forecasted
oil production for the period from mid-September 2004 to May 2005,
Dominion discontinued certain cash flow hedges effective September 14,
2004. In connection with the discontinuance of these cash flow hedges,
Dominion reclassified $71 million of pre-tax losses from AOCI to earnings in
2004. These amounts were reported in other operations and maintenance
expense in the Consolidated Statements of Income.
9. Discontinued Operations —
Telecommunications Operations
Dominion Fiber Ventures, LLC (DFV) was a joint venture originally formed by
Dominion and a third-party investor trust (Investor Trust) to fund the devel-
opment of its principal subsidiary, Dominion Telecom, Inc. (Dominion Tele-
com). Dominion Telecom was a facilities-based interchange and emerging
local carrier, providing broadband solutions to wholesale customers
throughout the eastern United States. In connection with its formation,
DFV issued $665 million of 7.05% senior secured notes due March 2005
which were secured in part by Dominion convertible preferred stock held in
trust. Dominion was the beneficial owner of the trust and thus did not pre-
sent the convertible preferred stock in its Consolidated Balance Sheets.
During 2004, as a result of the retirement of DFV’s senior notes, the trust
was dissolved and the convertible preferred stock was retired.
At inception, Dominion’s strategy for Dominion Telecom was to focus
primarily on delivering lit capacity, dark fiber and collocation services to
under-served markets. With the markets for these services not growing at
rates originally contemplated and the continuing downward pressure on
prices, resulting from excess capacity in the telecommunications industry,
Dominion reconsidered its investment strategy during 2003. Reflecting a
revision in long-term expectations for potential growth in telecommunica-
tions service revenue, Dominion approved a strategy to sell its interest in
the telecommunications business and began reporting Dominion Telecom
as a discontinued operation in the fourth quarter of 2003.
2004
— Sale of Dominion Telecom
In May 2004, Dominion completed the sale of its discontinued telecommu-
nication operations to Elantic Telecom, Inc., realizing a loss of $11 million
($7 million after-tax, $0.02 per share) related to the sale. The results of
telecommunications operations, including revenue of $8 million and a loss
before income taxes of $19 million, are presented as discontinued opera-
tions, on a net basis, on the Consolidated Statement of Income for 2004.
During July 2004, Elantic Telecom Inc. filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S.
Bankruptcy Court for the Eastern District of Virginia, Richmond Division.
Dominion is currently assessing its potential exposure, if any, as a result of
this filing. At December 31, 2004, Dominion has $9 million of remaining
guarantees related to Dominion Telecom.
2003
— Asset Impairments
The change in strategy in 2003 included a review of Dominion Telecom’s
network assets and related inventories for impairment. As a result,
Dominion recognized a $566 million impairment of network assets and
related inventories, reflecting the excess of the assets carrying amount
over their estimated fair values. This amount included the allocation of
$16 million to the Investor Trust, representing its minority interest share of
these charges. Management determined the estimated fair values with the
assistance of an independent appraiser and subsequently updated the fair
values based on preliminary bids received in connection with the sale of
Dominion Telecom.
Since realization of tax benefits related to the impairment charges will
be dependent upon Dominion’s future tax profile and taxable earnings,
management established a valuation allowance that completely offsets
the deferred tax benefits. In addition, Dominion increased the valuation
allowance on deferred tax assets previously recognized, resulting in a
$48 million increase in deferred income tax expense.
2003
— Additional Investments in DFV
The DFV senior notes contained certain stock price and credit downgrade
triggers that could have resulted in the issuance of the convertible preferred
stock held in trust. In the first quarter of 2003, Dominion purchased
$633 million of DFV senior notes to reduce the likelihood that the remarket-
ing of the Dominion convertible preferred stock held in trust would ever
occur and, in connection with the purchase, obtained consent to remove the
triggers from the indenture. Dominion paid a total of $664 million for the
notes acquired and recognized a pre-tax charge of $57 million, reported in
other expenses on the Consolidated Statement of Income. The charge con-
sisted of the premium paid to acquire the notes, the consent fee paid to the
note holders and the recognition of previously unamortized debt costs. After
the transaction, Dominion owned a total of $644 million of DFV senior notes
with the remaining $21 million of outstanding notes held by third parties.
Dominion began consolidating the results of DFV in its Consolidated
Financial Statements in February 2003, as a result of acquiring substan-
tially all of DFV’s outstanding senior notes. Prior to this acquisition,
Dominion accounted for DFV as an equity-method investment, due to
the Investor Trust’s equity investment and veto rights.
In the fourth quarter of 2003, Dominion purchased the Investor Trust’s
interest in DFV for $62 million, including $2 million for accrued dividends.
This transaction was accounted for as a purchase of a minority interest
and $60 million was recognized as goodwill and impaired. The purchase
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