Dominion Power 2004 Annual Report Download - page 89

Lease Commitments
Dominion leases various facilities, vehicles and equipment under both
operating and capital leases. Payments under certain leases are escalated
based on an index such as the consumer price index. Future minimum lease
payments under noncancelable operating and capital leases that have ini-
tial or remaining lease terms in excess of one year as of December 31, 2004
are as follows (in millions):
2005 2006 2007 2008 2009 Thereafter Total
$133 $117 $108 $97 $87 $365 $907
Rental expense totaled $123 million, $105 million and $98 million for
2004, 2003 and 2002, respectively, the majority of which is reflected in
other operations and maintenance expense.
Dominion has an agreement with a voting interest entity (lessor) to
lease the Fairless power station in Pennsylvania (Fairless), which began
commercial operations in June 2004. During construction, Dominion acted
as the construction agent for the lessor, controlled the design and construc-
tion of the facility and has since been reimbursed for all project costs
advanced to the lessor. Project costs totaled $898 million at December 31,
2004. Dominion will make annual lease payments of $53 million, which are
reflected in the lease commitments table above. The lease expires in 2013
and at that time, Dominion may renew the lease at negotiated amounts
based on original project costs and current market conditions, subject to
lessor approval; purchase Fairless at its original construction cost; or sell
Fairless, on behalf of the lessor, to an independent third party. If Fairless is
sold and the proceeds from the sale are less than its original construction
cost, Dominion would be required to make a payment to the lessor in an
amount up to 70.75% of original project costs adjusted for certain other
costs as specified in the lease. The lease agreement does not contain any
provisions that involve credit rating or stock price trigger events.
Environmental Matters
Dominion is subject to costs resulting from a steadily increasing number of
federal, state and local laws and regulations designed to protect human
health and the environment. These laws and regulations can result in
increased capital, operating and other costs as a result of compliance,
remediation, containment and monitoring obligations.
Historically, Dominion recovered such costs arising from regulated elec-
tric operations through utility rates. However, to the extent environmental
costs are incurred in connection with operations regulated by the Virginia
State Corporation Commission during the period ending December 31, 2010,
in excess of the level currently included in Virginia jurisdictional rates,
Dominion’s results of operations will decrease. After that date, Dominion
may seek recovery through rates of only those environmental costs related
to transmission and distribution operations.
Superfund Sites
— From time to time, Dominion may be identified as a
potentially responsible party to a Superfund site. The Environmental Pro-
tection Agency (EPA) (or a state) can either (a) allow such a party to con-
duct and pay for a remedial investigation, feasibility study and remedial
action or (b) conduct the remedial investigation and action and then seek
reimbursement from the parties. Each party can be held jointly, severally
and strictly liable for all costs. These parties can also bring contribution
actions against each other and seek reimbursement from their insurance
companies. As a result, Dominion may be responsible for the costs of
remedial investigation and actions under the Superfund Act or other
laws or regulations regarding the remediation of waste. Dominion
does not believe that any currently identified sites will result in significant
liabilities.
In 1987, the EPA identified Dominion and a number of other entities as
Potentially Responsible Parties (PRPs) at two Superfund sites located in
Kentucky and Pennsylvania. In 2003, the EPA issued its Certificate of Com-
pletion of remediation for the Kentucky site. Future costs for the Kentucky
site will be limited to minor operations and maintenance expenditures.
Remediation design is ongoing for the Pennsylvania site, and total remedi-
ation costs are expected to be in the range of $13 million to $25 million.
Based on allocation formulas and the volume of waste shipped to the site,
Dominion has accrued a reserve of $2 million to meet its obligations at
these two sites. Based on a financial assessment of the PRPs involved at
these sites, Dominion has determined that it is probable that the PRPs will
fully pay their share of the costs. Dominion generally seeks to recover its
costs associated with environmental remediation from third party insurers.
At December 31, 2004, any pending or possible claims were not recognized
as an asset or offset against such obligations.
Other EPA Matters
— In relation to a Notice of Violation received by Vir-
ginia Power in 2000 from the EPA, Dominion entered into a Consent Decree
settlement in 2003 and committed to improve air quality. Dominion has
already incurred certain capital expenditures for environmental improve-
ments at its coal-fired stations in Virginia and West Virginia. Dominion con-
tinues to commit to additional measures in its current financial plans and
capital budget to satisfy the requirements of the Consent Decree.
Other
— Before being acquired by Dominion in 2001, Louis Dreyfus Nat-
ural Gas Corp. (Louis Dreyfus) was one of numerous defendants in a law-
suit consolidated and pending in the 93rd Judicial District Court in Hidalgo
County, Texas. The lawsuit alleges that gas wells and related pipeline facil-
ities operated by Louis Dreyfus and facilities operated by other defendants
caused an underground hydrocarbon plume in McAllen, Texas. The plain-
tiffs claim that they have suffered damages, including property damage
and lost profits, as a result of the alleged plume. Although the results of lit-
igation are inherently unpredictable, Dominion does not expect the ulti-
mate outcome of the case to have a material adverse impact on its results
of operations, cash flows or financial position.
Dominion has determined that it is associated with 20 former manufac-
tured gas plant sites. Studies conducted by other utilities at their former
manufactured gas plants have indicated that their sites contain coal tar
and other potentially harmful materials. None of the 20 former sites with
which Dominion is associated is under investigation by any state or federal
environmental agency, and no investigation or action is currently antici-
pated. At this time, it is not known to what degree these sites may contain
environmental contamination. Dominion is not able to estimate the cost, if
any, that may be required for the possible remediation of these sites.
Nuclear Operations
Nuclear Decommissioning — Minimum Financial Assurance — The NRC
requires nuclear power plant owners to annually update minimum financial
assurance amounts for the future decommissioning of its nuclear facilities.
Dominion’s 2004 NRC minimum financial assurance amount, aggregated for
the nuclear units, was $2.6 billion and has been satisfied by a combination
of guarantees and the funds being collected and deposited in the trusts.
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