Dominion Power 2000 Annual Report Download - page 47

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Reclassification
Certain amounts in the 1999 and 1998 Consolidated Financial
Statements have been reclassified to conform to the 2000
presentation.
Note 3 Accounting Changes
Accounting for Net Periodic Pension Cost
Effective January 1, 2000, Dominion adopted a company-wide
method of calculating the market related value of pension plan
assets used to determine the expected return on pension plan
assets, a component of net periodic pension cost. Under the new
method, the market related value of pension plan assets reflects
the difference between actual investment returns and expected
investment returns evenly over a four-year period. Prior to
Dominion’s acquisition of CNG, each company used different meth-
ods to determine the “calculated value” of the market related value
of pension plan assets. The previous Dominion method recognized
interest, dividends and realized gains immediately and deferred
unrealized gains and losses evenly over a five-year period. The for-
mer CNG method calculated the market related value of pension
plan assets as the average of market values at the end of each of
the preceding four years, with appropriate adjustments for receipts,
disbursements, and investment income during the period. Dominion
believes that the new method is preferable to continuing to use
either or both of the former methods as the new method enhances
the predictability of expected return on pension plan assets, pro-
vides consistent treatment of all investment gains and losses, and
results in calculated market related pension plan asset values that
are closer to market value as compared to values calculated under
the previous methods.
The $21 million cumulative effect of the change on prior years
(net of income taxes of $11 million) is included in income for the
year ended December 31, 2000. The effect of the change on 2000
was to increase income before extraordinary item and cumulative
effect of a change in accounting principle by $11 million ($0.05 per
share-basic and diluted) and net income by $32 million ($0.14 per
share-basic and diluted).
Retroactive application of the new method, on a pro forma
basis, would not have materially changed Dominion’s net income
for 1999 or 1998.
Accounting for Oil and Gas Activities
Effective upon the acquisition of CNG on January 28, 2000,
Dominion changed its method of accounting for oil and gas explo-
ration and production activities to the full cost method of account-
ing. Previously, Dominion accounted for these activities, which
were primarily directed toward development and extraction rather
than exploration, using the successful efforts method of accounting.
While the Company’s previous method of accounting was in
accordance with generally accepted accounting principles, the
Company believes that the full cost method of accounting is prefer-
able for its merged exploration and production operations. CNG’s
exploration and production business is historically larger than
Dominion’s and consists of substantial investments in exploration
activities. CNG uses the full cost method of accounting for its
exploration and production activities which management believes
better reflects the economics associated with the discovery and
development of oil and gas reserves. It is anticipated that the
strategic direction of the combined exploration and production
operations will be consistent with CNG’s past operations, thus sup-
porting the adoption of the full cost method of accounting.
Prior year financial statements have been restated to reflect this
change on a retroactive basis. The effect of the accounting change
on income in 2000, and on income as previously reported for 1999
and 1998 is not significant.
The balances of retained earnings for 1999 and 1998 have been
restated for the effect (net of income taxes) of applying retroac-
tively the new method of accounting.
Note 4 Recently Issued Accounting Standards
In June 2000, the Financial Accounting Standards Board (FASB)
issued SFAS No. 138, Accounting for Certain Derivative Instruments
and Certain Hedging Activities, which amends SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 133 requires that all derivative instruments be recorded on the
Company’s balance sheet at their fair value effective January 1, 2001.
The Company holds certain commodity contracts for trading
purposes that are currently subject to fair value accounting under
Emerging Issues Task Force Issue No. 98-10, Accounting for
Contracts Involved in Energy Trading and Risk Management
Activities. The Company determined that certain additional con-
tracts will be subject to fair value accounting under SFAS No. 133.
A substantial portion of these contracts is used by Dominion in its
production and delivery of energy to its customers and involves var-
ious hedging strategies. In addition to these commodity contracts,
Dominion uses interest rate swaps to manage its cost of capital.
Under SFAS No. 133, changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated and
effective as part of a hedge strategy, and, if it is, whether such
strategy represents a fair value or cash flow hedge. For fair value
hedge strategies, where Dominion is hedging the changes in the
fair value of assets, liabilities or firm commitments, changes in the
fair value of the derivative instruments will generally be offset in
the income statement by changes in the fair value of the hedged
items. For cash flow hedge strategies, where Dominion is hedging
the variability of cash flows related to variable-priced assets,
liabilities or forecasted transactions, including anticipated produc-
tion, purchases or sales, changes in the fair value of the derivative
instruments will be reported in other comprehensive income.
Amounts recorded in other comprehensive income will be adjusted
for changes in fair value until reclassified to earnings. Such reclas-
sification will generally occur when earnings are affected by the
hedged transactions (e.g., anticipated sales). As amounts