Dominion Power 2004 Annual Report Download - page 91

included in the $795 million net amount due to these counterparties
reported on Dominion’s Consolidated Balance Sheet at December 31, 2004.
There are no significant liabilities reflected on Dominion’s Consolidated
Balance Sheets for its subsidiaries’ power generation project leasing oblig-
ation, nuclear obligations or other miscellaneous obligations.
While the majority of these guarantees do not have a termination date,
Dominion may choose at any time to limit the applicability of such guaran-
tees to future transactions.
As of December 31, 2004, substantially all of the officers’ borrowings
under executive stock loan programs, which were guaranteed by Dominion,
have been repaid. Because of restrictions on corporate loans or guarantees
for executives under the Sarbanes-Oxley Act of 2002, Dominion has ceased
its program of third party loans to executives for the purpose of acquiring
company stock.
Surety Bonds and Letters of Credit
Dominion had also purchased $77 million of surety bonds and autho-
rized the issuance of standby letters of credit by financial institutions of
$1.7 billion. Dominion enters into these arrangements to facilitate commer-
cial transactions by its subsidiaries with third parties.
Indemnifications
As part of commercial contract negotiations in the normal course of busi-
ness, Dominion may sometimes agree to make payments to compensate or
indemnify other parties for possible future unfavorable financial conse-
quences resulting from specified events. The specified events may involve
an adverse judgment in a lawsuit or the imposition of additional taxes due
to a change in tax law or interpretation of the tax law. Dominion is unable
to develop an estimate of the maximum potential amount of future pay-
ments under these contracts because events that would obligate Dominion
have not yet occurred or, if any such event has occurred, Dominion has not
been notified of its occurrence. However, at December 31, 2004, manage-
ment believes future payments, if any, that could ultimately become
payable under these contract provisions, would not have a material impact
on its results of operations, cash flows or financial position.
Stranded Costs
In 1999, Virginia enacted the Virginia Restructuring Act that established a
detailed plan to restructure Virginia’s electric utility industry. Under the Vir-
ginia Restructuring Act, the generation portion of Dominion’s Virginia juris-
dictional operations is no longer subject to cost-based regulation. The
legislation’s deregulation of generation was an event that required the dis-
continuance of SFAS No. 71 for the Virginia jurisdictional portion of
Dominion’s generation operations in 1999. In April 2004, the Governor of
Virginia signed into law amendments to the Virginia Restructuring Act and
the Virginia fuel factor statute. The amendments extend capped base rates
by three and one-half years, to December 31, 2010, unless modified or ter-
minated earlier under the Virginia Restructuring Act. In addition to extend-
ing capped rates, the amendments:
•Lock in Dominion’s fuel factor provisions until the earlier of July 1, 2007
or the termination of capped rates;
•Provide for a one-time adjustment of Dominion’s fuel factor, effective
July 1, 2007 through December 31, 2010 (unless capped rates are termi-
nated earlier under the Virginia Restructuring Act), with no adjustment
for previously incurred over-recovery or under-recovery, thus eliminat-
ing deferred fuel accounting for the Virginia jurisdiction; and
•End wires charges on the earlier of July 1, 2007 or the termination
of capped rates, consistent with the Virginia Restructuring Act’s
original timetable.
Wires charges, also known as competitive transition charges, are
permitted to be collected by utilities until July 1, 2007, under the Virginia
Restructuring Act. Dominion has agreed to forego the collection of wires
charges in 2005, and as such Virginia customers will not pay a fee if they
switch from Dominion to a different service provider.
Dominion believes capped electric retail rates and, where applicable,
wires charges provided under the Virginia Restructuring Act provide an
opportunity to recover a portion of its potentially stranded costs, depend-
ing on market prices of electricity and other factors. Stranded costs are
those generation-related costs incurred or commitments made by utilities
under cost-based regulation that may not be reasonably expected to be
recovered in a competitive market.
Even in the capped rate environment, Dominion remains exposed to
numerous risks, including, among others, exposure to potentially stranded
costs, future environmental compliance requirements, changes in tax laws,
inflation and increased capital costs. At December 31, 2004, Dominion’s
exposure to potentially stranded costs included: long-term power purchase
contracts that could ultimately be determined to be above market; generat-
ing plants that could possibly become uneconomic in a deregulated envi-
ronment; and unfunded obligations for nuclear plant decommissioning and
postretirement benefits not yet recognized in the financial statements.
23. Fair Value of Financial Instruments
Substantially all of Dominion’s financial instruments are recorded at fair
value, with the exception of the instruments described below that are
reported at historical cost. Fair values have been determined using avail-
able market information and valuation methodologies considered appropri-
ate by management. The financial instruments’ carrying amounts and fair
values as of December 31, 2004 and 2003 were as follows:
2004 2003
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value(1) Amount Value(1)
(millions)
Long-term debt $15,446 $16,499 $15,588 $16,514
Junior subordinated notes
payable to affiliated trusts 1,429 1,595 1,440 1,608
(1) Fair value is estimated using market prices, where available, and interest rates currently
available for issuance of debt with similar terms and remaining maturities. The carrying
amount of debt issues with short-term maturities and variable rates refinanced at current
market rates is a reasonable estimate of their fair value.
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