Dominion Power 2002 Annual Report Download - page 59

amounts yet to be billed to customers. Operating revenue from
energy trading activities includes realized commodity contract
revenue, net of related cost of sales, and unrealized gains and
losses resulting from marking to market those commodity con-
tracts not yet settled. See Note 7. Beginning October 25, 2002
and January 1, 2003, in accordance with new accounting
requirements discussed further in Note 4, Dominion discontin-
ued marking to market unsettled commodity contracts that are
not otherwise accounted for as derivatives under Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities.
Electric Fuel,Purchased Energy and Purchased
Gas—Deferred Costs
Where permitted by regulatory authorities, the differences
between actual electric fuel, purchased energy and purchased
gas expenses and levels of recovery for these expenses in current
rates are deferred and matched against recoveries in future peri-
ods. See Regulatory Assets and Liabilities below and Note 19.
Income Taxes
Dominion and its subsidiaries file a consolidated federal income
tax return. Where permitted by regulatory authorities, the treat-
ment of temporary differences can differ from the requirements
of SFAS No. 109, Accounting for Income Taxes. Accordingly, a
regulatory asset has been recognized if it is probable that future
revenues will be provided for the payment of deferred tax liabili-
ties. Deferred investment tax credits are amortized over the
service lives of the properties giving rise to the credits.
Stock-Based Compensation
Dominion sponsors two stock plans that provide stock-based
awards to directors, executives and other key employees. Under
the plans, Dominion grants stock options and restricted stock
awards that vest over periods ranging from three to five years.
Options have contractual terms that range from seven to ten
years. Forty million shares of common stock may be issued
under the plans and approximately 12 million of those are
available for new grants as of December 31, 2002.
Dominion measures compensation cost for stock-based
awards issued to its employees in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations. Compensation
expense is measured based on the intrinsic value, the difference
between fair market value of Dominion common stock and the
exercise price of the underlying award, on the date when both
the price and number of shares the recipient is entitled to
receive are known, generally the grant date. Compensation
expense is recognized on a straight-line basis over the stated
vesting period of the award. See Note 24 for more information
on stock-based awards.
The following table illustrates the pro forma effect on
net income and earnings per share if Dominion had applied
the fair value recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, to stock-based
employee compensation:
Year Ended December 31, 2002 2001 2000
(millions)
Net income—as reported $1,362 $ 544 $ 436
Add: actual stock-based compensation
expense, net of tax(1) 518 6
Deduct: pro forma stock-based
compensation expense, net of tax (52) (49) (12)
Net income—pro forma $1,315 $ 513 $ 430
Basic EPS—as reported $ 4.85 $2.17 $1.85
Basic EPS—pro forma 4.68 2.05 1.82
Diluted EPS—as reported 4.82 2.15 1.85
Diluted EPS—pro forma 4.65 2.03 1.82
(1) Actual stock-based compensation expense reflects primarily the issuance of
restricted stock. For 2001, stock-based compensation expense also includes
an after-tax charge of $11 million for stock options modified in the 2001
restructuring initiative discussed in Note 8.
Cash and Cash Equivalents
Current banking arrangements generally do not require checks
to be funded until actually presented for payment. At December
31, 2002 and 2001, accounts payable included the net effect of
checks outstanding but not yet presented for payment of $101
million and $214 million, respectively. For purposes of the Con-
solidated Statements of Cash Flows, Dominion considers cash
and cash equivalents to include cash on hand, cash in banks and
temporary investments purchased with a remaining maturity of
three months or less. In December 2002, Dominion deposited
$500 million in escrow to be used solely for repayment of debt
maturing in January 2003. Those restricted funds are not
included as cash and cash equivalents on the Consolidated
Balance Sheets or Consolidated Statements of Cash Flows.
Margin Deposit Assets and Liabilities
Amounts reported as margin deposit assets represent funds held
on deposit by various trading counterparties that resulted from
Dominion exceeding agreed-upon credit limits established by
the counterparties. Amounts reported as margin deposit liabili-
ties represent funds held by Dominion that resulted from vari-
ous trading counterparties exceeding agreed-upon credit limits
established by Dominion. These credit limits and the mecha-
nism for calculating the amounts to be held on deposit are
determined in the International Swap Dealers Association
master agreements and the Master Power Purchase & Sale
Agreement of the Edison Electric Institute in place between
Dominion and the counterparties. As of December 31, 2002
and December 31, 2001, Dominion had margin deposit assets of
$149 million and $30 million, respectively, and margin deposit
liabilities (reported in other current liabilities) of $22 million
and $88 million, respectively.
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Dominion ’02 Annual Report