Dominion Power 2005 Annual Report Download - page 89

Additionally, as of December 31, 2005 we had purchased $70
million of surety bonds and authorized the issuance of standby let-
ters of credit by financial institutions of $4.2 billion to facilitate
commercial transactions by our subsidiaries with third parties.
Indemnifications
As part of commercial contract negotiations in the normal course of
business, we may sometimes agree to make payments to compen-
sate or indemnify other parties for possible future unfavorable
financial consequences resulting from specified events. The speci-
fied events may involve an adverse judgment in a lawsuit or the
imposition of additional taxes due to a change in tax law or interpre-
tation of the tax law. We are unable to develop an estimate of the
maximum potential amount of future payments under these con-
tracts because events that would obligate us have not yet occurred
or, if any such event has occurred, we have not been notified of its
occurrence. However, at December 31, 2005, we believe future
payments, if any, that could ultimately become payable under these
contract provisions, would not have a material impact on our
results of operations, cash flows or financial position.
Stranded Costs
In 1999, Virginia enacted the Virginia Restructuring Act that estab-
lished a detailed plan to restructure Virginia’s electric utility indus-
try. Under the Virginia Restructuring Act, the generation portion of
our Virginia jurisdictional operations is no longer subject to cost-
based regulation. The legislation’s deregulation of generation was
an event that required us to discontinue the application of SFAS
No. 71, Accounting for the Effects of Certain Types of Regulation,
to the Virginia jurisdictional portion of our generation operations
in 1999. In 2004, amendments to the Virginia Restructuring Act
and the Virginia fuel factor statute were adopted. The amend-
ments extend capped base rates by three and one-half years, to
December 31, 2010, unless modified or terminated earlier under
the Virginia Restructuring Act. In addition to extending capped
rates, the amendments:
•Lock in our fuel factor provisions until the earlier of July 1, 2007
or the termination of capped rates under the Virginia Restructur-
ing Act, with no adjustment for previously incurred over-recovery
or under-recovery of fuel costs, thus eliminating deferred fuel
accounting for the Virginia jurisdiction;
•Provide for a one-time adjustment of our fuel factor, effective
July 1, 2007 through December 31, 2010 (unless capped rates
are terminated earlier under the Virginia Restructuring Act), with
no adjustment for previously incurred over-recovery or under-
recovery of fuel costs; and
•End wires charges on the earlier of July 1, 2007 or the termina-
tion of capped rates.
Wires charges are permitted to be collected by utilities until July
1, 2007, under the Virginia Restructuring Act. Our wires charges
are set at zero in 2006 for all rate classes, and as such, Virginia
customers will not pay a fee if they switch from us to a different
competitive service provider.
We believe capped electric retail rates and, where applicable,
wires charges provided under the Virginia Restructuring Act provide
an opportunity to recover our potential stranded costs, depending
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.
Recovery of our potential stranded costs remains subject to
numerous risks even in the capped-rate environment. These
include, among others, exposure to long-term power purchase
commitment losses, future environmental compliance require-
ments, changes in certain tax laws, nuclear decommissioning
costs, increased fuel costs, inflation, increased capital costs and
recovery of certain other items. At December 31, 2005, our expo-
sure to potential stranded costs included: long-term power pur-
chase agreements that could ultimately be determined to be above
market; generating plants that could possibly become uneconomic
in a deregulated environment; and unfunded obligations for
nuclear plant decommissioning and postretirement benefits not
yet recognized in the financial statements.
Note 24. Fair Value of Financial Instruments
Substantially all of our 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 available market information and valuation methodologies
considered appropriate by management. The financial instruments’
carrying amounts and fair values are as follows:
At December 31, 2005 2004
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value(1) Amount Value(1)
(millions)
Long-term debt(2) $15,567 $15,928 $15,446 $16,499
Junior subordinated notes
payable to affiliated trusts 1,416 1,537 1,429 1,595
(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.
(2) Includes securities due within one year.
Note 25. Credit Risk
Credit risk is our risk of financial loss if counterparties fail to per-
form their contractual obligations. In order to minimize overall credit
risk, we maintain credit policies, including the evaluation of coun-
terparty financial condition, collateral requirements and the use of
standardized agreements that facilitate the netting of cash flows
associated with a single counterparty. In addition, counterparties
may make available collateral, including letters of credit or cash
held as margin deposits, as a result of exceeding agreed-upon
credit limits, or may be required to prepay the transaction. Amounts
reported as margin deposit liabilities represent funds held by us
that resulted from various trading counterparties exceeding agreed-
upon credit limits established by us. Amounts reported as margin
deposit assets represent funds held on deposit by various trading
counterparties that resulted from us exceeding agreed-upon credit
limits established by the counterparties. As of December 31, 2005
and 2004, we had margin deposit assets (reported in other
current assets) of $160 million and $179 million, respectively,
and margin deposit liabilities (reported in other current liabilities)
of $133 million and $28 million, respectively.
We maintain a provision for credit losses based on factors
surrounding the credit risk of our customers, historical trends
and other information. We believe, based on our credit policies
Dominion 2005 87