Dominion Power 2007 Annual Report Download - page 35

Ladysmith expansion project discussed in Utility Generation
Expansion under Future Issues and Other Matters.
In conjunction with the results of a review of our portfolio of
assets, Peaker facilities, with a combined carrying amount of $504
million, were marketed for sale in the third quarter of 2006. An
impairment analysis, performed in the third quarter of 2006,
indicated that the carrying amount of each of the Peaker facilities
was recoverable as the expected undiscounted cash flows, proba-
bility weighted to reflect both continued use and possible sale
scenarios, exceeded the carrying amount. In December 2006, we
reached an agreement to sell the Peaker facilities and accordingly,
we reduced their carrying amounts to fair value less cost to sell
and classified them as assets held for sale in our Consolidated
Balance Sheet. Also in the fourth quarter of 2006, in conjunction
with a review of our assets, a decision was made to no longer
pursue the development of a gas transmission pipeline project
with capitalized construction costs of $28 million. The pipeline
project was previously tested for impairment during 2005. The
results of our analysis in 2005 indicated that this asset was not
impaired based on the probability of continued construction and
use at that time. Impairment charges totaling $280 million ($181
million after-tax) were recorded in December 2006 related to the
Peaker facilities and the gas transmission pipeline project.
A
CCOUNTING FOR R EGULATED O PERATIONS
The accounting for our regulated electric and gas operations dif-
fers from the accounting for nonregulated operations in that we
are required to reflect the effect of rate regulation in our Con-
solidated Financial Statements. For regulated businesses subject to
federal or state cost-of-service rate regulation, regulatory practices
that assign costs to accounting periods may differ from account-
ing methods generally applied by nonregulated companies. When
it is probable that regulators will permit the recovery of current
costs through future rates charged to customers, we defer these
costs as regulatory assets that otherwise would be expensed by
nonregulated companies. Likewise, we recognize regulatory
liabilities when it is probable that regulators will require customer
refunds through future rates or when revenue is collected from
customers for expenditures that have yet to be incurred. Gen-
erally, regulatory assets are amortized into expense and regulatory
liabilities are amortized into income over the period authorized by
the regulator.
As discussed further in Note 2 to our Consolidated Financial
Statements, in April 2007, the Virginia General Assembly passed
legislation that returned the Virginia jurisdiction of our utility
generation operations to cost-of-service rate regulation. As a
result, we reapplied the provisions of Statement of Financial
Accounting Standards (SFAS) No. 71, Accounting for the Effects of
Certain Types of Regulation (SFAS No. 71), to those operations on
April 4, 2007, the date the legislation was enacted. The
reapplication of SFAS No. 71 to the Virginia jurisdiction of our
utility generation operations resulted in a $259 million ($158
million after tax) extraordinary charge and the reclassification of
$195 million ($119 million after tax) of unrealized gains from
AOCI related to nuclear decommissioning trust funds. This
established a $454 million long-term regulatory liability for
amounts previously collected from Virginia jurisdictional custom-
ers and placed in external trusts (including income, losses and
changes in fair value thereon) for the future decommissioning of
our utility nuclear generation stations, in excess of amounts
recorded pursuant to SFAS No. 143, Accounting for Asset Retire-
ment Obligations (SFAS No. 143). In connection with the
reapplication or SFAS No. 71, we prospectively changed certain
of our accounting policies for the Virginia jurisdiction of our
utility generation operations to those used by cost-of-service rate-
regulated entities. Other than the extraordinary item previously
discussed, the overall impact of these changes was not material to
our results of operations or financial condition in 2007.
We evaluate whether or not recovery of our regulatory assets
through future rates is probable and make various assumptions in
our analyses. The expectations of future recovery are generally
based on orders issued by regulatory commissions or historical
experience, as well as discussions with applicable regulatory
authorities. If recovery of a regulatory asset is determined to be
less than probable, it will be written off in the period such assess-
ment is made. In 2006, we wrote off $166 million of our regu-
latory assets as a result of the planned sale of Peoples and Hope
since the recovery of those assets was no longer probable. We
currently believe the recovery of our remaining regulatory assets is
probable. See Notes 2, 6 and 15 to our Consolidated Financial
Statements.
A
SSET R ETIREMENT O BLIGATIONS
We recognize liabilities for the expected cost of retiring tangible
long-lived assets for which a legal obligation exists. These asset
retirement obligations (AROs) are recognized at fair value as
incurred, and are capitalized as part of the cost of the related long-
lived assets. In the absence of quoted market prices, we estimate
the fair value of our AROs using present value techniques, in
which we make various assumptions including estimates of the
amounts and timing of future cash flows associated with retire-
ment activities, credit-adjusted risk free rates and cost escalation
rates. AROs currently reported in our Consolidated Balance
Sheets were measured during a period of historically low interest
rates. The impact on measurements of new AROs or remeasure-
ments of existing AROs, using different rates in the future, may
be significant. When we revise any assumptions used to calculate
the fair value of existing AROs, we adjust the carrying amount of
both the ARO liability and the related long-lived asset. We
accrete the ARO liability to reflect the passage of time. In 2007,
2006 and 2005, we recognized $99 million, $109 million and
$102 million, respectively, of accretion, and expect to incur $95
million in 2008. Upon reapplication of SFAS No. 71 to the Vir-
ginia jurisdiction of our utility generation operations, we began
recording accretion and depreciation associated with utility
nuclear decommissioning AROs, formerly charged to expense, as
an adjustment to the regulatory liability for nuclear
decommissioning trust funds previously discussed, in order to
match the recognition for rate-making purposes.
A significant portion of our AROs relates to the future decom-
missioning of our nuclear facilities. At December 31, 2007,
nuclear decommissioning AROs, which are reported in the
Dominion Generation segment, totaled $1.5 billion, representing
approximately 85% of our total AROs. Based on their sig-
nificance, the following discussion of critical assumptions
inherent in determining the fair value of AROs relates to those
associated with our nuclear decommissioning obligations.
Dominion 2007 Annual Report 33