Dominion Power 2004 Annual Report Download - page 68

Notes to Consolidated Financial Statements, Continued
losses upon retirement of generation-related property based upon the dif-
ference between proceeds received, if any, and the property’s undepreci-
ated 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 deprecia-
tion rates on property, plant and equipment are as follows:
2004 2003 2002
(percent)
Generation 2.10 1.95 2.34
Transmission 2.21 2.22 2.26
Distribution 3.19 3.18 3.27
Storage 3.05 2.81 2.47
Gas gathering and processing 2.58 2.39 2.31
General and other 5.49 5.67 5.74
Amortization of nuclear fuel used in electric generation is provided 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 distribution prop-
erty based on depreciation studies that indicated longer lives were appro-
priate. The change reduced annual depreciation expense for those assets
by approximately $68 million.
Dominion follows the full cost method of accounting for gas and oil
exploration and production activities prescribed by the SEC. Under the full
cost method, all direct costs of property acquisition, exploration and devel-
opment activities are capitalized. These capitalized costs are subject to a
quarterly ceiling test. Under the ceiling test, amounts capitalized are lim-
ited to the present value of estimated future net revenues to be derived
from the anticipated production of proved gas and oil reserves, assuming
period-end pricing adjusted for cash flow hedges in place. If net capitalized
costs exceed the ceiling test at the end of any quarterly period, then a per-
manent write-down of the assets must be recognized in that period. The
ceiling test is performed separately for each cost center, with cost centers
established on a country-by-country basis. Approximately 16% of
Dominion’s anticipated production is hedged by qualifying cash flow
hedges, for which hedge-adjusted prices were used to calculate estimated
future net revenue. Whether period-end market prices or hedge-adjusted
prices were used for the portion of production that is hedged, there was no
ceiling test impairment as of December 31, 2004. Dominion adopted Staff
Accounting Bulletin No. 106 (SAB 106) as of December 31, 2004 and,
accordingly, excludes future cash flows associated with settling AROs that
have been accrued on the balance sheet pursuant to SFAS No. 143,
A
ccounting for Asset Retirement Obligations , from its calculations under
the full cost ceiling test.
Depreciation of gas and oil producing properties is computed using the
units-of-production method. Under the full cost method, the depreciable
base of costs subject to amortization also includes estimated future costs
to be incurred in developing proved gas and oil reserves, as well as capital-
ized asset retirement costs, net of projected salvage values. The costs of
investments in unproved properties are initially excluded from the depre-
ciable base. Until the properties are evaluated, a ratable portion of the
capitalized costs is periodically reclassified to the depreciable base, deter-
mined on a property by property basis, over terms of underlying leases.
Once a property has been evaluated, any remaining capitalized costs are
then transferred to the depreciable base. In addition, gains or losses on the
sale or other disposition of gas and oil properties are not recognized,
unless the gain or loss would significantly alter the relationship between
capitalized costs and proved reserves of natural gas and oil attributable to
a country. See
Asset Retirement Obligations for a discussion of gas and oil
abandonment and dismantlement costs.
Goodwill and Intangible Assets
Dominion evaluates goodwill for impairment annually, as of April 1st, and
whenever an event occurs or circumstances change in the interim that
would more likely than not reduce the fair value of a reporting unit below
its carrying amount. Intangible assets with finite lives are amortized over
their estimated useful lives.
Impairment of Long-Lived and Intangible Assets
Dominion performs an evaluation for impairment whenever events or
changes in circumstances indicate that the carrying amount of long-lived
assets or intangible assets with finite lives may not be recoverable. These
assets are written down to fair value if the sum of the expected future
undiscounted cash flows is less than the carrying amounts.
Regulatory Assets and Liabilities
For utility operations subject to federal or state cost-of-service rate regula-
tion, regulatory practices that assign costs to accounting periods may differ
from accounting methods generally applied by nonregulated companies.
When it is probable that regulators will allow for the recovery of current
costs through future rates charged to customers, Dominion defers these
costs and recognizes regulatory assets in its financial statements that oth-
erwise would be expensed by nonregulated companies. Likewise,
Dominion recognizes regulatory liabilities in its financial statements when
it is probable that regulators will allow for customer credits through future
rates and when revenue is collected from customers for expenditures that
are not yet incurred.
Asset Retirement Obligations
Beginning in 2003, Dominion recognizes its AROs at fair value as incurred,
capitalizing these amounts as costs of the related tangible long-lived
assets. Due to the absence of relevant market information, fair value is
estimated using discounted cash flow analyses. Dominion reports the
accretion of the liabilities due to the passage of time as an operating
expense. In addition, beginning in 2003, Dominion classifies all invest-
ments held by its decommissioning trusts as available-for-sale, and recog-
nizes realized gains and losses in other income (loss) and records
unrealized gains and losses in AOCI.
Nuclear Decommissioning
— 2002
Utility Nuclear Plants — In accordance with the accounting policy recognized
by regulatory authorities having jurisdiction over its electric utility opera-
tions, Dominion recognized an expense for the future cost of decommis-
sioning in amounts equal to the sum of amounts collected from ratepayers
and earnings on trust investments dedicated to funding the decommission-
ing of Dominion’s utility nuclear plants. The trust investments were
reported at fair value with the accumulated provision for decommissioning
reported as a liability. Net realized and unrealized earnings on the trust
investments, as well as an offsetting expense to increase the accumulated
provision for decommissioning, was recorded as a component of other
income (loss).
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