Dominion Power 2007 Annual Report Download - page 78

Notes to Consolidated Financial Statements, Continued
income (loss) or regulatory assets or regulatory liabilities as appro-
priate. Those amounts will be subsequently recognized as a
component of net periodic benefit cost (credit) on the same basis
as the amounts recognized in AOCI, regulatory assets and regu-
latory liabilities at adoption of SFAS No. 158.
EITF 04-13
Prior to the sale of our non-Appalachian E&P business, we
entered into buy/sell and related agreements primarily as a means
to reposition our offshore Gulf of Mexico crude oil production to
more liquid onshore marketing locations and to facilitate gas
transportation. In September 2005, the FASB ratified the EITF’s
consensus on Issue No. 04-13, Accounting for Purchases and Sales
of Inventory with the Same Counterparty (EITF 04-13), which
requires buy/sell and related agreements to be presented on a net
basis in our Consolidated Statements of Income if they are
entered into in contemplation of one another. We adopted the
provisions of EITF 04-13 on April 1, 2006 for new arrangements
and modifications or renewals of existing arrangements made after
that date. As a result, a significant portion of our activity related
to buy/sell arrangements is presented on a net basis in our Con-
solidated Statements of Income for 2007 and 2006; however,
there was no impact on our results of operations or cash flows.
Pursuant to the transition provisions of EITF 04-13, activity
related to buy/sell arrangements that were entered into prior to
April 1, 2006 and have not been modified or renewed after that
date continue to be reported on a gross basis and are included in
the activity summarized below:
Year Ended December 31, 2007 2006 2005
(millions)
Sale activity included in operating revenue $67 $576 $623
Purchase activity included in operating
expenses(1) 72 578 651
(1) Included in other energy-related commodity purchases expense and pur-
chased gas expense in our Consolidated Statements of Income.
2005
FIN 47
We adopted FASB Interpretation No. 47, Accounting for Condi-
tional Asset Retirement Obligations (FIN 47), on December 31,
2005. FIN 47 clarifies that an entity is required to recognize a
liability for the fair value of a conditional ARO when the obliga-
tion is incurred—generally upon acquisition, construction, or
development and/or through the normal operation of the asset, if
the fair value of the liability can be reasonably estimated. A condi-
tional ARO is a legal obligation to perform an asset retirement
activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the
control of the entity. Uncertainty about the timing and/or
method of settlement is required to be factored into the
measurement of the liability when sufficient information exists.
Our adoption of FIN 47 resulted in the recognition of an
after-tax charge of $6 million, representing the cumulative effect
of the change in accounting principle.
Presented below are our pro forma net income and EPS as if
we had applied the provisions of FIN 47 as of January 1, 2005:
Year Ended December 31, 2005
(millions, except per share amounts)
Net income—as reported $1,033
Net income—pro forma 1,038
Basic EPS—as reported 1.51
Basic EPS—pro forma 1.52
Diluted EPS—as reported 1.50
Diluted EPS—pro forma 1.51
If we had applied the provisions of FIN 47 as of January 1,
2005, our AROs would have increased by $140 million.
N OTE 4. R ECENTLY I SSUED A CCOUNTING
S TANDARDS
SFAS N O . 157
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (SFAS No. 157), which defines fair value, estab-
lishes a framework for measuring fair value and expands dis-
closures related to fair value measurements. SFAS No. 157
clarifies that fair value should be based on assumptions that mar-
ket participants would use when pricing an asset or liability and
establishes a fair value hierarchy of three levels that prioritizes the
information used to develop those assumptions. The fair value
hierarchy gives the highest priority to quoted prices in active
markets and the lowest priority to unobservable data. SFAS
No. 157 requires fair value measurements to be separately dis-
closed by level within the fair value hierarchy. The provisions of
SFAS No. 157 became effective for us beginning January 1, 2008.
Generally, the provisions of this statement are to be applied pro-
spectively. Certain situations, however, require retrospective
application as of the beginning of the year of adoption through
the recognition of a cumulative effect of accounting change. Such
retrospective application is required for financial instruments,
including derivatives and certain hybrid instruments with limi-
tations on initial gains or losses under EITF Issue No. 02-3, Issues
Involved in Accounting for Derivative Contracts Held for Trading
Purposes and Contracts Involved in Energy Trading and Risk
Management Activities, and SFAS No. 155. Retrospective applica-
tion will result in an immaterial amount recognized through
cumulative effect of accounting change. We are currently evaluat-
ing the impact that SFAS No. 157 will have on our results of
operations and financial condition for the provisions to be applied
prospectively.
In February 2008, the FASB issued FSP FAS No. 157-1,
Application of FASB Statement No. 157 to FASB Statement No. 13
and Its Related Interpretive Accounting Pronouncements That
Address Leasing Transactions, which excludes leasing transactions
from the scope of SFAS No. 157. However, the exclusion does
not apply to fair value measurements of assets and liabilities
recorded as a result of a lease transaction but measured pursuant
to other pronouncements within the scope of SFAS No. 157.
In February 2008, the FASB issued FSP FAS No. 157-2,
EffectiveDateofFASBStatementNo.157, which delays the effec-
tive date of SFAS No. 157 by one year for non-financial assets
and liabilities, except those that are recognized or disclosed
76 Dominion 2007 Annual Report