Dominion Power 2004 Annual Report Download - page 65

•Other revenue consists primarily of miscellaneous service revenue from
electric and gas distribution operations; sales of coal and extracted
products; gas and oil processing; gas transmission pipeline capacity
release; sales of emissions credits; business interruption insurance
revenue associated with delayed gas and oil production caused by Hur-
ricane Ivan; and sales activity related to agreements used to facilitate
the marketing of oil production.
See
Derivative Instruments below for a discussion of accounting
changes, effective January 1, 2003 and October 1, 2003, which impacted the
recognition and classification of changes in fair value, including settle-
ments, of contracts held for energy trading and other purposes.
Crude Oil Buy/Sell Arrangements
Dominion enters into buy/sell and related agreements as a means to repo-
sition its offshore Gulf of Mexico crude oil production to more liquid mar-
keting locations onshore. Dominion typically enters into either a single or a
series of buy/sell transactions in which it sells its crude oil production at
the offshore field delivery point and buys similar quantities at Cushing,
Oklahoma for sale to third parties. Dominion is able to enhance profitability
by selling to a wide array of refiners and/or trading companies at Cushing,
one of the largest crude oil markets in the world, versus restricting sales to
a limited number of refinery purchasers in the Gulf of Mexico. These trans-
actions require physical delivery of the crude oil and the risks and rewards
of ownership are evidenced by title transfer, assumption of environmental
risk, transportation scheduling and counter party nonperformance risk.
Under the primary guidance of Emerging Issues Task Force (EITF) Issue
No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent,
Dominion presents the sales and purchases related to its crude oil buy/sell
arrangements on a gross basis in its Consolidated Statements of Income.
The EITF is currently discussing Issue No. 04-13,
Accounting for Purchases
and Sales of Inventory with the Same Counterparty,
which specifically
focuses on purchase and sale transactions made pursuant to crude oil
buy/sell arrangements. The EITF is evaluating whether these types of trans-
actions should be presented net in the Consolidated Statements of Income.
While resolution of this issue may affect the income statement presentation
of these revenues and expenses, there would be no impact on Dominion’s
results of operations or cash flows. Amounts currently shown on a gross
basis in Dominion’s Consolidated Statements of Income that could be
impacted by further EITF deliberations in this area are summarized below.
Year Ended December 31, 2004 2003 2002
(millions)
Sale activity included in operating revenue $290 $181 $164
Purchase activity included in operating expenses(1) 271 163 147
(1) Included in Liquids, pipeline capacity and other purchases
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. The deferral of costs or recovery of
fuel rate revenue in excess of current period expenses is recognized as a
regulatory asset or liability.
As for electric fuel and purchased energy expenses, effective January 1,
2004, Dominion’s fuel factor provisions for its Virginia retail customers are
locked in until the earlier of July 1, 2007 or the termination of capped rates,
with a one-time adjustment of the fuel factor, effective July 1, 2007 through
December 31, 2010, with no adjustment for previously incurred over-recov-
ery or under-recovery, thus eliminating deferred fuel accounting for the Vir-
ginia jurisdiction. As a result, approximately 12% of the cost of fuel used in
electric generation and energy purchases used to serve utility customers is
subject to deferral accounting. Prior to the amendments to the Virginia
Electric Utility Restructuring Act (Virginia Restructuring Act) and the Vir-
ginia fuel factor statute in 2004, approximately 93% of the cost of fuel used
in electric generation and energy purchases used to serve utility customers
had been subject to deferral accounting. Deferred costs associated with
the Virginia jurisdictional portion of expenditures incurred through 2003
continue to be reported as regulatory assets, pending recovery through
future rates.
Income Taxes
Dominion and its subsidiaries file a consolidated federal income tax return.
Where permitted by regulatory authorities, the treatment of temporary dif-
ferences can differ from the requirements of Statement of Financial
Accounting Standards (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 liabilities.
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. Deferred
investment tax credits are amortized over the service lives of the properties
giving rise to the credits.
Stock-based Compensation
Dominion sponsors a plan that provides stock-based awards to directors,
executives and other key employees. Under the plan, Dominion grants
stock options and restricted stock awards that vest over periods ranging
from one to five years. Options have contractual terms that range from six
and a half to ten years. Thirty million shares of common stock are regis-
tered under the plan, with approximately eight million shares available for
new grants as of December 31, 2004.
Dominion also had three plans under which its directors were granted
their stock retainers, deferred their cash fees and accumulated stock equiv-
alents. In December 2004, these three directors’ plans were amended to
freeze participation and prohibit deferral of compensation or granting of
new benefits after December 31, 2004 to comply with new deferred com-
pensation requirements of Section 885 of the American Jobs Creation Act
of 2004 (the Act) and Section 409A of the Internal Revenue Code of 1986,
as amended (the Code). A new directors’ plan was approved by the Board
to permit the deferral of compensation earned by Dominion’s non-employee
directors after December 31, 2004 in accordance with the Act and Section
409A of the Code and provides comparable benefits to those previously
included under the three frozen directors’ plans. The new directors’ plan is
subject to shareholder approval.
Dominion measures compensation expense for stock-based awards
issued to its employees using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to
Employees,
and related interpretations. Under this method, compensation
expense for restricted stock awards equals the fair value of Dominion’s
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