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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Additionally, due to interruptions in gas and oil production in
the Gulf of Mexico and southern Louisiana caused by Hurricanes
Katrina and Rita (2005 hurricanes), we discontinuedhedge
accounting for certain cash flow hedges in August and September
2005, since it became probablethat the forecasted sales of gasand
oil wouldnotoccur. In connection with thediscontinuance of
hedge accounting for these contracts, we reclassified $423 million
($272 million after-tax) of losses from AOCI to earnings in the
third quarter of 2005.
In June2006, we recorded a$60million ($37 million after-
tax) charge eliminating the application of hedge accounting for
certain interest rate swaps associated with our junior subordinated
notes payable to affiliated trusts that sold trust preferred securities.
Prior to June 30, 2006, we applied the shortcut methodoffair
value hedgeaccounting under SFASNo. 133 to these swaps,
allowing us to assume no hedge ineffectiveness forthese
derivatives. We determined that these swaps did not qualify for
the shortcut methodbecause of an interest deferral mechanism
within the junior subordinated notes and they could not qualify
forhedge accounting retrospectively because the hedgedoc-
umentation required for the long-haul methodwas not in place at
the inception of the hedge. These instruments were and we
believed would continue to be highly effective economic hedges.
We re-designated the interest rateswaps associated with these
transactions as fair value hedges under the long-haul accounting
methodin order to qualify them prospectively forfair value hedge
accounting under SFAS No. 133. Losses related to the dis-
continuance of hedge accounting are reported in other operations
and maintenance expense in our Consolidated Statements of
Income.
The following table presents selected information related to
cash flow hedges included in AOCI in our Consolidated Balance
Sheet at December 31, 2006:
AOCI
After Tax
Portion Expected
to be Reclassified
to Earnings
during the Next
12 Months
After Tax
Maximum
Term
(millions)
Commodities:
Gas $(115) $(159) 51 months
Oil (253) (196) 36 months
Electricity (46) (65) 36 months
Interest rate (26) — 234 months
Foreign currency 18 9 9months
Total $(422) $(411)
The amounts that will be reclassified from AOCI to earnings
will generally be offset by the recognition of the hedged trans-
actions (e.g., anticipated sales) in earnings, thereby achieving the
realization of prices contemplated by the underlying risk
management strategies andwill vary from the expected amounts
presented above as aresult of changes in market prices, interest
rates and foreign exchange rates.
NOTE 9. DISPOSITIONS
Sale of Merchant Generation Facilities
In December 2006, we reached an agreement withanentity
jointly owned by Tenaska Power Fund, L.P. and Warburg Pincus
LLC to sell three of our natural gas-fired merchant generation
peakingfacilities (Peaker facilities). Peakingfacilities are used
duringtimes of high electricity demand, generally in the summer
months. The Peaker facilities are:
Armstrong, a 625 Mw station in Shelocta, Pennsylvania;
Troy, a 600 Mw station in Luckey, Ohio; and
Pleasants, a 313 Mw station in St. Mary’s, West Virginia.
The sale is expected to result in proceeds of approximately
$256 million and should close by the end of the first quarter of
2007, pending regulatoryapproval by the Federal Energy Regu-
latory Commission (FERC). We have obtainedapproval from the
Federal Trade Commission. No state regulatory approvals are
required.
We offeredthe facilities forsale following areview of our port-
folio of assets. We classifiedthese assetsas held forsale duringthe
fourth quarter of 2006 and adjusted their carrying amounts to fair
value less cost tosell, resulting in an impairment charge of $253
million ($164 million after-tax).
The carrying amounts of the majorclasses of assetsand
liabilities classified as held forsale in our Consolidated Balance
Sheet are comprised of property, plant and equipment, net ($245
million), inventory ($13 million) and accounts payable ($3
million).
The following table presents selected information regarding
the results of operations of the Peaker facilities, which are
reportedasdiscontinued operations in our Consolidated State-
ments of Income:
December 31, 2006 2005 2004
(millions)
Operating Revenue $42$71$62
Loss before income taxes (283) (19) (14)
The Peaker facilities’ operatingrevenues were related to sales
to other Dominion affiliates. In addition, the Peaker facilities
purchased $14 million, $38 million and$34million of electric
fuel from affiliates in 2006, 2005 and 2004, respectively.
76 DOMINION2006 Annual Report