Dominion Power 2004 Annual Report Download - page 88

Notes to Consolidated Financial Statements, Continued
Dominion determines the expected long-term rates of return on plan
assets for pension plans and other postretirement benefit plans by using a
combination of:
•Historical return analysis to determine expected future risk premiums;
•Forward-looking return expectations derived from the yield on long-
term bonds and the price earnings ratios of major stock market indices;
•Expected inflation and risk-free interest rate assumptions; and
•The types of investments expected to be held by the plans.
Assisted by an independent actuary, management develops assump-
tions, which are then compared to the forecasts of other independent
investment advisors to ensure reasonableness. An internal committee
selects the final assumptions.
Discount rates are determined from analyses performed by a third party
actuarial firm of AA/Aa rated bonds with cash flows matching the
expected payments to be made under Dominion’s plans.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point
change in assumed health care cost trend rates would have had the follow-
ing effects:
Other
Postretirement
Benefits
One One
percentage percentage
point point
increase decrease
(millions)
Effect on total service and interest cost components
for 2004 $ 22 $ (21)
Effect on postretirement benefit obligation at
December 31, 2004 $173 $(141)
In addition, Dominion sponsors defined contribution thrift-type savings
plans. During 2004, 2003 and 2002, Dominion recognized $29 million, $27
million and $26 million, respectively, as contributions to these plans.
Certain regulatory authorities have held that amounts recovered in util-
ity customers’ rates for other postretirement benefits, in excess of benefits
actually paid during the year, must be deposited in trust funds dedicated
for the sole purpose of paying such benefits. Accordingly, certain sub-
sidiaries fund postretirement benefit costs through Voluntary Employees’
Beneficiary Associations. The remaining subsidiaries do not prefund
postretirement benefit costs but instead pay claims as presented.
22. Commitments and Contingencies
As the result of issues generated in the ordinary course of business,
Dominion and its subsidiaries are involved in legal, tax and regulatory pro-
ceedings before various courts, regulatory commissions and governmental
agencies, some of which involve substantial amounts of money. Manage-
ment believes that the final disposition of these proceedings will not
have a material effect on Dominion’s financial position, liquidity or results
of operations.
Long-Term Purchase Agreements
Unconditional purchase obligations as defined by accounting standards are
those long-term commitments that are noncancelable or cancelable only
under certain conditions, and that third parties have used to secure financing
for the facilities that will provide the contracted goods or services. Presented
below is a summary of Dominion’s agreements as of December 31, 2004:
2005 2006 2007 2008 2009 Thereafter Total
(millions)
Purchased electric
capacity(1) $509 $496 $472 $440 $418 $3,103 $5,438
Production handling
for gas and oil
production
operations(2) 56 54 51 38 23 27 249
(1) Commitments represent estimated amounts payable for capacity under power purchase
contracts with qualifying facilities and independent power producers. Capacity payments
under the contracts are generally based on fixed dollar amounts per month, subject to
escalation using broad-based economic indices and payments for energy are based on the
applicable pricing times the units of electrical energy delivered. At December 31, 2004, the
present value of the total commitment for capacity payments is $3.4 billion. Capacity
payments totaled $570 million, $611 million and $661 million, and energy payments totaled
$293 million, $289 million and $219 million for 2004, 2003, and 2002, respectively.
(2) Payments under this contract, totaled $22 million and $10 million in 2004 and 2003,
respectively. No payments were made under this contract in 2002.
In 2004, Dominion paid $153 million in cash and assumed $213 million
of debt in connection with the termination of three long-term power pur-
chase agreements and the acquisition of the related generating facilities
used by non-utility generators to provide electricity to Dominion. In connec-
tion with the termination of the agreements, Dominion recorded after-tax
charges totaling $43 million. These charges include the reversal of a $167
million pre-tax contract liability associated with one of the terminated
agreements. The contract liability represented the remaining balance of
the fair value recorded in October 2003 upon adoption of SFAS No. 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). The power purchase agreement,
which contained pricing terms linked to a broad market index, had to be
recorded at fair value upon adoption of Issue C20; however, since it quali-
fied as a normal purchase and sale contract, no further changes in its fair
value were recognized. In 2003, Dominion paid $154 million for the pur-
chase of a generating facility and the termination of two long-term power
purchase agreements with non-utility generators. Dominion recorded
after-tax charges totaling $65 million for the termination of the long-term
power purchase agreements. Dominion allocates the purchase price to the
assets and liabilities acquired and the terminated agreements based on
their estimated fair values as of the date of acquisition.
In the fourth quarter of 2004, Dominion recorded a $112 million after-tax
charge related to its interest in a long-term power tolling contract with a
551 megawatt combined cycle facility located in Batesville, Mississippi.
Dominion decided to divest its interest in the long-term power tolling con-
tract in connection with its reconsideration of the scope of certain activi-
ties of the Dominion Energy Clearinghouse, including those conducted on
behalf of Dominion’s business segments, and its ongoing strategy to focus
on business activities within the MAIN to Maine region. The charge is
based on Dominion’s evaluation of preliminary bids received from third par-
ties, reflecting the expected amount of consideration that would be
required by a third party for its assumption of Dominion’s interest in the
contract in the first quarter of 2005.
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