Dominion Power 2003 Annual Report Download - page 66

64.Dominion 2003
Notes to Consolidated Financial Statements, Continued
SEC. Under the full cost method, all direct costs of property
acquisition, exploration and development activities are capital-
ized. These capitalized costs are subject to a quarterly “ceiling
test.” Under the ceiling test, amounts capitalized are limited to
the present value of estimated future net revenues to be derived
from the anticipated production of proved gas and oil reserves,
assuming period-end hedge-adjusted prices. If net capitalized
costs exceed the ceiling test at the end of any quarterly period,
then a permanent write-down of the assets must be recognized in
that period. The ceiling test is performed separately for each cost
center, with cost centers established on a country-by-country
basis. Approximately 14% of Dominion’s anticipated production
is hedged by qualifying cash flow hedges, for which hedge-
adjusted prices were used to calculate estimated future net
revenue. Whether period-end market prices or hedge-adjusted
prices were used for the portion of production that is hedged,
there was no ceiling test impairment as of December 31, 2003.
Depreciation of gas and oil producing properties is computed
using the units-of-production method. Under the full cost method,
the depreciable base of costs subject to amortization also
includes estimated future costs to be incurred in developing
proved gas and oil reserves, as well as capitalized asset retire-
ment costs, net of projected salvage values. The costs of invest-
ments in unproved properties are initially excluded from the
depreciable base. Until the properties are evaluated, a ratable
portion of the capitalized costs is periodically reclassified to the
depreciable base, determined on a property by property basis,
over terms of underlying leases. Once a property has been evalu-
ated, any remaining capitalized costs are then transferred to the
depreciable base. See Asset Retirement Obligations for a discus-
sion of gas and oil abandonment and dismantlement costs.
Goodwill and Intangible Assets
Goodwill is subject to review for impairment rather than periodic
amortization. Dominion evaluates goodwill for impairment at
least annually and whenever an event occurs or circumstances
change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount. Intangible assets with
finite lives are amortized over their estimated useful lives. Prior to
the adoption of SFAS No. 142, Goodwill and Other Intangible
Assets, on January 1, 2002, goodwill arising from acquisitions
completed before July 1, 2001 was amortized on a straight-line
basis over periods up to 40 years.
Impairment of Long-Lived and Intangible Assets
Dominion performs an evaluation for impairment whenever
events or changes in circumstances indicate that the carrying
amount of long-lived assets or intangible assets with finite lives
may not be recoverable. These assets are written down to fair
value if the sum of the expected future undiscounted cash flows is
less than the carrying amounts.
Regulatory Assets and Liabilities
For utility operations subject to federal or state cost-of-service rate
regulation, regulatory practices that assign costs to accounting
periods may differ from accounting methods generally applied
by non-regulated companies. The economic effects of practices
prescribed by regulatory authorities for rate-making purposes
must be considered in the application of generally accepted
accounting principles.
Asset Retirement Obligations
Beginning in 2003, Dominion recognizes its asset retirement
obligations at fair value as incurred, capitalizing these amounts
as costs of the related tangible long-lived assets. Due to the
absence of relevant market information, fair value is estimated
using discounted cash flow analyses. Dominion reports the accre-
tion of the liabilities due to the passage of time as an operating
expense. In addition, beginning in 2003, Dominion classifies all
investments held by its decommissioning trusts as available-for-
sale, and recognizes realized and unrealized gains and losses
in other income (loss) and other comprehensive income (loss),
as appropriate.
Nuclear Decommissioning
— 2002 and 2001
Utility Nuclear Plants In accordance with the accounting policy
recognized by regulatory authorities having jurisdiction over its
electric utility operations, Dominion recognized an expense for
the future cost of decommissioning in amounts equal to amounts
collected from ratepayers and earnings on trust investments dedi-
cated to funding the decommissioning of Dominion’s utility
nuclear plants. The trust investments were reported at fair value
with the accumulated provision for decommissioning reported
as a liability. Net realized and unrealized earnings on the trust
investments, as well as an offsetting expense to increase the
accumulated provision for decommissioning, was recorded as
a component of other income (loss).
Merchant Nuclear Plant Dominion recognized, as a liability
on the Consolidated Balance Sheet, an obligation to decommis-
sion its merchant nuclear plant. The obligation was based upon
its estimated fair value, using discounted cash flows of expected
costs to perform the decommissioning activities. Accretion of the
obligation was reported as depreciation expense. The external
trusts were accounted for as available-for-sale investments with
realized and unrealized earnings recognized in other income
and other comprehensive income, as appropriate.
Gas and Oil Dismantlement and Abandonment
Costs — 2002 and 2001
Through 2002, Dominion’s accounting and reporting practices for
future dismantlement and restoration activities for its gas and oil
wells and platforms recognized such costs as a component of
depletion expense and included them in accumulated depreciation,
depletion and amortization.