Dominion Power 2005 Annual Report Download - page 88

Notes to Consolidated Financial Statements, Continued
Nuclear Insurance — The Price-Anderson Act provides the
public up to $10.8 billion of protection per nuclear incident via
obligations required of owners of nuclear power plants. The Price-
Anderson Act Amendment of 1988 allows for an inflationary provi-
sion adjustment every five years. We have purchased $300 million
of coverage from the commercial insurance pools with the remain-
der provided through a mandatory industry risk-sharing program.
With the acquisition of Kewaunee in July 2005, we have seven
licensed reactors. In the event of a nuclear incident at any licensed
nuclear reactor in the United States, we could be assessed up to
$100.6 million for each of our seven licensed reactors not to
exceed $15 million per year per reactor. There is no limit to the
number of incidents for which this retrospective premium can be
assessed. The Price-Anderson Act was first enacted in 1957 and
was renewed again in 2005.
We purchase insurance from NEIL to cover the cost of replace-
ment power during the prolonged outage of a nuclear unit due to
direct physical damage of the unit. Under this program, we are sub-
ject to a retrospective premium assessment for any policy year in
which losses exceed funds available to NEIL. The current policy
period’s maximum assessment is $35 million.
Old Dominion Electric Cooperative, a part owner of North Anna
Power Station, and Massachusetts Municipal Wholesale Electric
Company and Central Vermont Public Service Corporation, part
owners of Millstone’s Unit 3, are responsible for their share of the
nuclear decommissioning obligation and insurance premiums on
applicable units, including any retrospective premium assessments
and any losses not covered by insurance.
Spent Nuclear Fuel
— Under provisions of the Nuclear Waste
Policy Act of 1982, we have entered into contracts with the Depart-
ment of Energy (DOE) for the disposal of spent nuclear fuel. The
DOE failed to begin accepting the spent fuel on January 31, 1998,
the date provided by the Nuclear Waste Policy Act and by our con-
tracts with the DOE. In January 2004, we and certain of our direct
and indirect subsidiaries filed a lawsuit in the United States Court of
Federal Claims against the DOE in connection with its failure to
commence accepting spent nuclear fuel. We will continue to safely
manage our spent fuel until it is accepted by the DOE.
Guarantees, Surety Bonds and Letters of Credit
At December 31, 2005, we had issued $37 million of guarantees
to support third parties, equity method investees and employees
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 agree-
ment, which is reflected in the lease commitments table, is for
approximately $99 million over the four-year term; however, we are
jointly and severally liable for up to $394 million to the contractor if
the other parties fail to pay the contractor for their obligations
under the primary term of the agreement, which we view as highly
unlikely. We have not recognized any significant liabilities related to
any of these guarantee arrangements.
We also enter into guarantee arrangements on behalf of our
consolidated subsidiaries primarily to facilitate their commercial
transactions with third parties. To the extent that a liability subject
to a guarantee has been incurred by one of our consolidated sub-
sidiaries, that liability is included in our Consolidated Financial
Statements. We are not required to recognize liabilities for guaran-
tees issued on behalf of our subsidiaries unless it becomes proba-
ble that we will have to perform under the guarantees. No such
liabilities have been recognized as of December 31, 2005. We
believe it is unlikely that we would be required to perform or other-
wise incur any losses associated with guarantees of our sub-
sidiaries’ obligations. At December 31, 2005, we had issued the
following subsidiary guarantees:
Stated Limit Value(1)
(millions)
Subsidiary debt(2) $1,268 $1,268
Commodity transactions(3) 3,823 1,539
Lease obligation for power generation facility(4) 898 898
Nuclear obligations(5) 355 303
Offshore drilling commitments 300 300
Other 594 413
Total $7,238 $4,721
(1) Represents the estimated portion of the guarantee’s stated limit that is utilized as of
December 31, 2005 based upon prevailing economic conditions and fact patterns specific to
each guarantee arrangement. For those guarantees related to obligations that are recorded
as liabilities by our subsidiaries, the value includes the recorded amount.
(2) Guarantees of $1.1 billion of debt reflected on our December 31, 2005 balance sheet related to
variable interest lessor entities through which we have financed and leased several power
generation projects. In the event of default by the subsidiaries, we would be obligated to
repay such amounts.
(3) Guarantees related to energy marketing activities and other commodity commitments of
certain subsidiaries, including subsidiaries of CNG and DEI. These guarantees were provided
to counterparties in order to facilitate physical and financial transactions in gas, oil,
electricity, pipeline capacity, transportation and related commodities and services. If any of
these subsidiaries fail to perform or pay under the contracts and the counterparties seek
performance or payment, we would be obligated to satisfy such obligation. We and our
subsidiaries receive similar guarantees as collateral for credit extended to others. The value
provided includes certain guarantees that do not have stated limits.
(4) Guarantee of a DEI subsidiary’s leasing obligation for the Fairless Energy power station.
(5) Guarantees related to Virginia Power’s and certain DEI subsidiaries’ potential retrospective
premiums that could be assessed if there is a nuclear incident under our nuclear insurance
programs and includes guarantees for Virginia Power’s commitment to buy nuclear fuel. Also,
as part of satisfying certain NRC requirements concerned with ensuring adequate funding for
the operations of the Millstone Power Station, we have also agreed to provide up to $150
million to a DEI subsidiary, if requested by such subsidiary, to pay Millstone’s operating
expenses.
86 Dominion 2005
Our current level of property insurance coverage ($2.55 billion
for North Anna, $2.55 billion for Surry, $2.75 billion for Millstone,
and $1.8 billion for Kewaunee) exceeds the NRC’s minimum
requirement for nuclear power plant licensees of $1.06 billion per
reactor site and includes coverage for premature decommissioning
and functional total loss. The NRC requires that the proceeds from
this insurance be used first to return the reactor to and maintain it
in a safe and stable condition and second to decontaminate the
reactor and station site in accordance with a plan approved by the
NRC. Our nuclear property insurance is provided by the Nuclear
Electric Insurance Limited (NEIL), a mutual insurance company, and
is subject to retrospective premium assessments in any policy ear
in which losses exceed the funds available to the insurance com-
pany. The maximum assessment for the current policy period is
$99 million. Based on the severity of the incident, the board of
directors of our nuclear insurer has the discretion to lower or elimi-
nate the maximum retrospective premium assessment. We have
the financial responsibility for any losses that exceed the limits or
for which insurance proceeds are not available because they must
first be used for stabilization and decontamination.