Dominion Power 2003 Annual Report Download - page 63

61.Dominion 2003
services. Also included are regulated gas distribution charges to
retail distribution service customers opting for alternate suppliers;
Gas and oil production consists primarily of sales of natural
gas, oil and condensate produced by Dominion. Gas and oil
production revenue is reported net of royalties and
Other revenue consists primarily of miscellaneous service rev-
enue from electric and gas distribution operations; sales of coal,
brokered oil and other extracted products; gas and oil processing
and gas transmission pipeline capacity release.
See Derivative Instruments below for a discussion of account-
ing changes, effective January 1, 2003 and October 1, 2003,
that impacted the recognition and classification of changes in fair
value, including settlements, of contracts held for energy trading
and other purposes.
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 the levels of recovery for these expenses in
current rates are deferred and matched against recoveries in
future periods.
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 reg-
ulatory asset has been recognized if it is probable that future rev-
enues will be provided for the payment of deferred tax liabilities.
Deferred investment tax credits are amortized over the service
lives of the properties giving rise to the credits.
Dominion establishes a valuation allowance when it is more
likely than not that all or a portion of a deferred tax asset will not
be realized.
Dominion has not provided for U.S. deferred income taxes or
foreign withholding taxes on its remaining undistributed earnings
of $116 million of its non-U.S. subsidiaries since these earnings
are intended to be reinvested indefinitely.
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 these shares are avail-
able for new grants as of December 31, 2003.
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 rec-
ognized on a straight-line basis over the stated vesting period of
the award.
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, 2003 2002 2001
(millions)
Net income — as reported $ 318 $1,362 $ 544
Add: actual stock-based compensation
expense, net of tax (1) 10 518
Deduct: pro forma stock-based
compensation expense, net of tax (36) (52) (49)
Net income — pro forma $ 292 $1,315 $ 513
Basic EPS — as reported $1.00 $ 4.85 $2.17
Basic EPS — pro forma 0.92 4.68 2.05
Diluted EPS — as reported 1.00 4.82 2.15
Diluted EPS — pro forma 0.92 4.65 2.03
(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 6.
Cash and Cash Equivalents
Current banking arrangements generally do not require checks to
be funded until actually presented for payment. At December 31,
2003 and 2002, accounts payable included the net effect of
checks outstanding but not yet presented for payment of $123 mil-
lion and $101 million, respectively. For purposes of the Consoli-
dated Statements of Cash Flows, Dominion considers cash and
cash equivalents to include cash on hand, cash in banks and tem-
porary investments purchased with a remaining maturity of three
months or less.
Inventories
Materials and supplies and fossil fuel inventories are valued
using primarily the weighted-average cost method. Stored gas
inventory used in local gas distribution operations is valued using
the last-in-first-out (LIFO) method. Under the LIFO method, those
inventories were valued at $59 million and $52 million at
December 31, 2003 and December 31, 2002, respectively.
Based on the average price of gas purchased during 2003,
the cost of replacing the current portion of stored gas inventory
exceeded the amount stated on a LIFO basis by approximately
$265 million. Stored gas inventory held by certain nonregulated
gas operations is valued using the weighted average cost method.
Derivative Instruments
Dominion uses derivative instruments such as futures, swaps,
forwards and options to manage the commodity, currency
exchange and financial market risks of its business operations.
Dominion also manages a portfolio of commodity contracts held