Dominion Power 2005 Annual Report Download - page 68

Notes to Consolidated Financial Statements, Continued
contracts. Income statement amounts related to periods prior to
October 1, 2003 are presented as originally reported. See Note 2.
Statement 133 Implementation Issue No. C20
In connection with a request to reconsider an interpretation of SFAS
No. 133, the FASB issued Statement 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 establishes criteria for determining
whether a contract’s pricing terms that contain broad market
indices (e.g., the consumer price index) could qualify as a normal
purchase or sale and, therefore, not be subject to fair value
accounting. We had several contracts that qualified as normal pur-
chase and sales contracts under the Issue C20 guidance. However,
the adoption of Issue C20 required those contracts to be initially
recorded at fair value as of October 1, 2003, resulting in the recog-
nition of an after-tax charge of $75 million, representing the cumu-
lative effect of the change in accounting principle. As normal
purchase and sales contracts, no further changes in fair value
were recognized.
FIN 46R
On December 31, 2003, we adopted FIN 46R for our interests in
special purpose entities, resulting in the consolidation of several
special purpose lessor entities through which we had constructed,
financed and leased several new power generation projects, as well
as our corporate headquarters and aircraft. As a result, our Consoli-
dated Balance Sheet as of December 31, 2003 reflected an addi-
tional $644 million in net property, plant and equipment and
deferred charges and $688 million of related debt. This resulted in
additional depreciation expense of approximately $20 million in
both 2005 and 2004. The cumulative effect in 2003 of adopting
FIN 46R for our interests in special purpose entities was an after-
tax charge of $27 million, representing depreciation expense and
amortization associated with the consolidated assets.
From 1997 through 2002, we established five capital trusts that
sold trust preferred securities to third-party investors. We received
the proceeds from the sale of the trust preferred securities in
exchange for various junior subordinated notes issued to be held by
the trusts. Upon adoption of FIN 46R, we began reporting as long-
term debt our junior subordinated notes held by the trusts rather
than the trust preferred securities. As a result, in 2005 and
2004, we reported interest expense on the junior subordinated
notes rather than preferred distribution expense on the trust
preferred securities.
Note 4. Recently Issued Accounting Standards
SFAS No. 123R
SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No.
123R), requires that compensation cost relating to share-based
payment transactions be recognized in the financial statements
based on the fair value of the equity or liability instruments issued.
SFAS No. 123R covers a wide range of share-based compensation
arrangements, including share options, restricted share plans, per-
formance-based awards, share appreciation rights and employee
share purchase plans. In addition, SFAS No. 123R clarifies the tim-
ing of expense recognition for share-based awards with terms that
accelerate vesting upon retirement.
Our restricted stock awards contain terms that accelerate vest-
ing upon retirement. Under current practice, compensation cost for
these awards is recognized over the stated vesting term unless
vesting is actually accelerated by retirement. Upon adoption of
SFAS No. 123R, we will continue to recognize compensation cost
over the stated vesting term for existing restricted stock awards, but
will be required to recognize compensation cost over the shorter of
the stated vesting term or period from the date of grant to the date
of retirement eligibility for newly issued or modified restricted stock
awards. At December 31, 2005, unrecognized compensation cost
for restricted stock awards held by retirement eligible employees
totaled $9 million.
SFAS No. 123R also requires the benefits of tax deductions in
excess of recognized share-based compensation expense to be
classified as a financing cash flow, rather than as an operating cash
flow. This requirement will reduce net operating cash flow and
increase net financing cash flow in periods after adoption.
We adopted SFAS No. 123R and related guidance on January 1,
2006, using the modified prospective transition method. Under this
transition method, compensation cost will be recognized (a) based
on the requirements of SFAS No. 123R for all share-based awards
granted subsequent to January 1, 2006 and (b) based on the
original provisions of SFAS No. 123 for all awards granted prior to
January 1, 2006, but not vested as of this date. Results for prior
periods will not be restated. The ongoing application of SFAS No.
123R is not expected to have a material impact on our results of
operations or financial condition.
SFAS No. 154
In May 2005, the FASB issued SFAS No. 154, Accounting Changes
and Error Corrections. SFAS No. 154 applies to all voluntary
changes in accounting principle and requires retrospective applica-
tion to prior periods’ financial statements of a voluntary change
in accounting principle unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change.
We will apply the provisions of SFAS No. 154 to voluntary account-
ing changes on or after January 1, 2006.
EITF 04-5
In June 2005, the FASB ratified the consensus reached by the
EITF on Issue No. 04-5, Determining Whether a General Partner,
or the General Partners as a Group, Controls a Limited Partnership
or Similar Entity When the Limited Partners Have Certain Rights.
EITF 04-5 provides guidance in assessing when a general partner
should consolidate its investment in a limited partnership or similar
entity. The provisions of EITF 04-5 were required to be applied
beginning June 30, 2005 by general partners of all newly formed
limited partnerships and for existing limited partnerships for which
the partnership agreements are modified and is effective for gen-
eral partners in all other limited partnerships beginning January 1,
2006. There was no impact on our results of operations or financial
condition related to our adoption of EITF 04-5.
EITF 04-13
We enter into buy/sell and related agreements primarily as a means
to reposition our offshore Gulf of Mexico crude oil production to
more liquid marketing locations onshore. We typically enter into
either a single or a series of buy/sell transactions in which we sell
our crude oil production at the offshore field delivery point and buy
similar quantities at Cushing, Oklahoma for sale to third parties. We
are able to enhance profitability by selling to a wide array of refiners
and/or trading companies at Cushing, one of the largest crude oil
markets in the world, versus restricting sales to a limited number of
refinery purchasers in the Gulf of Mexico.
66 Dominion 2005