Dominion Power 2005 Annual Report Download - page 47

Dominion 2005 45
Our planned capital expenditures during 2006 and 2007 are
expected to total approximately $3.8 billion and $3.9 billion,
respectively. These expenditures are expected to include construc-
tion and expansion of generation and LNG facilities, environmental
upgrades, construction improvements and expansion of gas and
electric transmission and distribution assets, purchases of nuclear
fuel and expenditures to explore for and develop natural gas and oil
properties. We expect to fund our capital expenditures with cash
from operations and a combination of securities issuances and
short-term borrowings.
We may choose to postpone or cancel certain planned capital
expenditures in order to mitigate the need for future debt financings.
Use of Off-Balance Sheet Arrangements
Forward Equity Transaction
As described in Financing Cash Flows and Liquidity
— Forward Equity
Transaction, in September 2004 we entered into a forward equity
sale agreement relating to 10 million shares of our common stock.
The use of a forward agreement allowed us to avoid equity market
uncertainty by pricing a stock offering under then current market
conditions, while mitigating share dilution by postponing the
issuance of stock until funds were needed.
Guarantees
We primarily enter into guarantee arrangements on behalf of our
consolidated subsidiaries. These arrangements are not subject to
the recognition and measurement provisions of FASB Interpretation
No. 45, Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Oth-
ers. See Note 23 to our Consolidated Financial Statements for fur-
ther discussion of these guarantees.
At December 31, 2005, we have issued $37 million of guaran-
tees to support third parties, equity method investees and employ-
ees affected by Hurricane Katrina. In addition, in 2005, we, along
with two other gas and oil exploration and production companies,
entered into a four-year drilling contract related to a new, ultra-
deepwater drilling rig that is expected to be delivered in mid-2008.
The contract has a four-year primary term, plus four one-year
extension options. Our minimum commitment under the agreement
is for approximately $99 million over the four-year term; however,
we are jointly and severally liable for up to $394 million to the con-
tractor if the other parties fail to pay the contractor for their obliga-
tions under the primary term of the agreement. We view this
scenario as highly unlikely and have not recognized any significant
liabilities related to any of these arrangements.
Leasing Arrangement
We have an agreement with a voting interest entity (lessor) to lease
the Fairless power station in Pennsylvania, which began commer-
cial operations in June 2004. During construction, we acted as the
construction agent for the lessor, controlled the design and con-
struction of the facility and have since been reimbursed for all pro-
ject costs ($898 million) advanced to the lessor. We make annual
lease payments of $53 million. The lease expires in 2013 and at
that time, we 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, we 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.
Benefits of this arrangement include:
•Certain tax benefits as we are considered the owner of the
leased property for tax purposes. As a result, we are entitled to
tax deductions for depreciation not recognized for financial
accounting purposes; and
•As an operating lease for financial accounting purposes, the
asset and related borrowings used to finance the construction of
the asset are not included on our Consolidated Balance Sheets.
Although this improves measures of leverage calculated using
amounts reported in our Consolidated Financial Statements,
credit rating agencies view lease obligations as debt equivalents
in evaluating our credit profile.
Securitizations of Mortgages and Loans
As of December 31, 2005, we held $285 million of retained inter-
ests from securitizations of mortgage and commercial loans com-
pleted in prior years. We did not securitize or originate any loans in
2005 or 2004. Investors in the securitization trusts have no
recourse to our other assets for failure of debtors to repay principal
and interest on the underlying loans when due. Therefore, our expo-
sure to any future losses from this activity is limited to our invest-
ment in the retained interests.
Future Issues and Other Matters
Gas and Oil Production
Due to Hurricanes Katrina and Rita, our production assets in the
Gulf of Mexico and, to a lesser extent, South Louisiana were tem-
porarily shut in. Prior to the hurricanes, these assets were produc-
ing approximately 435 million cubic feet of natural gas equivalent
per day (mmcfed). We had forecasted production increases to
approximately 700 mmcfed during October with the addition of four
previously announced deepwater projects, plus other planned com-
pletion activity. As of mid-January 2006, our Gulf of Mexico and
South Louisiana assets were producing approximately 500
mmcfed, however 330 mmcfed of this production was accom-
plished via temporary measures. The production delays are primar-
ily the result of damage to third-party downstream facilities. The
majority of the third-party downstream facilities are projected to
become operational by the second quarter of 2006, with the
remainder estimated to be on stream by year-end. We expect that
the financial impacts of delays in production will be mitigated by
business interruption insurance that we maintain for hurricane-
related delays in natural gas and oil production. Our business inter-
ruption insurance covers delays caused both by damage to our own
production facilities and by damage to third-party facilities down-
stream. Our policy coverage for Hurricane Katrina has a 30-day
deductible period and an event limit of $700 million, while our pol-
icy for Hurricane Rita has a 45-day deductible period and an event
limit of $350 million.
Status of Electric Deregulation in Virginia
The Virginia Electric Utility Restructuring Act (Virginia Restructuring
Act) was enacted in 1999 and established a plan to restructure the
electric utility industry in Virginia. The Virginia Restructuring Act
addressed, among other things: capped base rates, RTO participa-
tion, retail choice, the recovery of stranded costs, and the func-
tional separation of a utility’s electric generation from its electric
transmission and distribution operations.