Dominion Power 2003 Annual Report Download - page 65

63.Dominion 2003
Statement of Income Presentation:
Derivatives Held for Trading Purposes All changes in fair
value, including amounts realized upon settlement, are presented in
revenue on a net basis as nonregulated electric sales, nonregulated
gas sales and other revenue.
Financially-Settled Derivatives — Not Held for Trading Pur-
poses or Designated as Hedging Instruments All unrealized
changes in fair value and settlements are presented in other
operations and maintenance expense on a net basis.
Physically-Settled Derivatives — Not Held for Trading Pur-
poses or Designated as Hedging Instruments Effective October
1, 2003, all statement of income related amounts for physically
settled derivative sales contracts are presented in revenue, while
all statement of income related amounts for physically settled
derivative purchase contracts are reported in expenses. For the
nine months ended September 30, 2003, unrealized changes in
fair value for physically settled derivative contracts are presented
in other operations and maintenance expense on a net basis.
Non-derivative energy-related contracts are no longer subject
to fair value accounting, effective January 1, 2003. Dominion rec-
ognizes revenue or expense on a gross basis at the time of con-
tract performance, settlement or termination. Prior to 2003, all
energy trading contracts, including non-derivative contracts,
were recorded at fair value with changes in fair value reported
in revenue on a net basis.
Investment Securities
Dominion accounts for and classifies investments in marketable
equity and debt securities in two categories. Debt and equity
securities purchased and held with the intent of selling them in the
near term are classified as trading securities. Trading securities
are reported at fair value with net realized and unrealized gains
and losses included in earnings. All other debt and equity securi-
ties are classified as available-for-sale securities. These are
reported at fair value with realized gains and losses included in
earnings and unrealized gains and losses reported as a compo-
nent of accumulated other comprehensive income, net of tax.
Dominion analyzes all securities classified as available-for-
sale to determine whether a decline in its fair value should be
considered other-than-temporary. Dominion uses several criteria
to evaluate other-than-temporary declines including length of time
over which the market value has been lower than its cost, the per-
centage of the decline as compared to its average cost and the
expected fair value of the security. If the market value of the secu-
rity has been less than cost for greater than nine months and the
decline in value is greater than 50% of its average cost, the secu-
rity is written down to its expected recovery value. If only one of
the above criteria is met, a further analysis is performed to evalu-
ate the expected recovery value based on third party price tar-
gets. If the third party price quotes are below the security’s
average cost and one of the other criteria has been met, the
decline is considered other-than-temporary and the security is
written down to its expected recovery value.
Property, Plant and Equipment
Property, plant and equipment, including additions and replace-
ments, is recorded at original cost, including labor, materials,
other direct costs and capitalized interest. The costs of repairs
and maintenance, including minor additions and replacements,
are charged to expense as incurred. In 2003, 2002 and 2001,
Dominion capitalized interest costs of $96 million, $95 million
and $41 million, respectively.
For electric and gas distribution and transmission property
subject to cost-of-service utility rate regulation, the cost of such
property, less salvage, is charged to accumulated depreciation
at retirement. Amounts related to cost of removal collections
and expenditures are recorded as regulatory liabilities or
regulatory assets.
For generation-related property, cost of removal not associ-
ated with asset retirement obligations is charged to expense as
incurred. Dominion records gains and losses upon retirement of
generation-related property based upon the difference between
proceeds received, if any, and the property’s undepreciated basis
at the retirement date.
Depreciation of property, plant and equipment is computed
on the straight-line method based on projected service lives.
Dominion’s depreciation rates on property, plant and equipment
are as follows:
2003 2002 2001
(percent)
Generation 1.95 2.34 2.78
Transmission 2.22 2.26 2.58
Distribution 3.18 3.27 3.43
Storage 2.81 2.47 2.57
Gas gathering and processing 2.39 2.31 2.19
General and other 5.67 5.74 4.94
Amortization of nuclear fuel used in electric generation is pro-
vided on a units-of-production basis sufficient to fully amortize,
over the estimated service life, the cost of the fuel plus permanent
storage and disposal costs.
In 2002, Dominion extended the estimated useful lives of most
of its fossil fuel power stations and electric transmission and dis-
tribution property based on depreciation studies that indicated
longer lives were appropriate. In 2001, Dominion increased the
estimate of the useful lives of its nuclear property by 20 years in
connection with license extensions already received from the
Nuclear Regulatory Commission (NRC) and current filings of
applications for other units. The changes reduced depreciation
expense as follows:
2003 2002 2001
(millions)
Nuclear $94 $94 $78
Fossil fuel, electric transmission and distribution 68 42 —
Dominion follows the full cost method of accounting for gas
and oil exploration and production activities prescribed by the