Dominion Power 2005 Annual Report Download - page 65

relationship’s effectiveness, such as gains or losses attributable
to changes in the time value of options or changes in the differ-
ence between spot prices and forward prices, are included in
other operations and maintenance expense.
Valuation Methods
Fair value is based on actively quoted market prices, if available.
In the absence of actively quoted market prices, we seek indicative
price information from external sources, including broker quotes
and industry publications. If pricing information from external
sources is not available, we must estimate prices based on avail-
able historical and near-term future price information and certain
statistical methods, including regression analysis.
For options and contracts with option-like characteristics where
pricing information is not available from external sources, we gener-
ally use a modified Black-Scholes Model that considers time value,
the volatility of the underlying commodities and other relevant
assumptions when estimating fair value. We use other option mod-
els under special circumstances, including a Spread Approximation
Model, when contracts include different commodities or commodity
locations and a Swing Option Model, when contracts allow either
the buyer or seller the ability to exercise within a range of quantities.
For contracts with unique characteristics, we estimate fair value
using a discounted cash flow approach deemed appropriate in the
circumstances and applied consistently from period to period. If
pricing information is not available from external sources, judgment
is required to develop the estimates of fair value. For individual con-
tracts, the use of different valuation models or assumptions could
have a material effect on the contract’s estimated fair value.
Investment Securities
We account for and classify investments in marketable equity and
debt securities in two categories. Debt and equity securities pur-
chased 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 securities, including all invest-
ments held by our nuclear decommissioning trusts, are classified
as available-for-sale securities.
Available-for-sale securities are reported at fair value with real-
ized gains and losses and any other-than-temporary declines in fair
value included in earnings and unrealized gains and losses reported
as a component of AOCI, net of tax.
We analyze all securities classified as available-for-sale to deter-
mine whether a decline in fair value should be considered other-
than-temporary. Retained interests from securitizations of financial
assets are evaluated in accordance with Emerging Issues Task
Force (EITF) Issue No. 99-20, Recognition of Interest Income and
Impairments of Purchased and Retained Beneficial Interests in
Securitized Financial Assets. For other securities, we use several
criteria to evaluate other-than-temporary declines, including length
of time over which the market value has been lower than its cost,
the percentage of the decline as compared to its average cost and
the expected fair value of the security. If the market value of the
security has been less than cost for more than eight months and
the decline in value is greater than 50% of its average cost, the
security is written down to fair value at the end of the reporting
period. If only one of the above criteria is met, a further analysis is
performed to evaluate the expected recovery value based on third-
party price targets. If the third-party price targets 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 fair value at the end of the reporting period.
Property, Plant and Equipment
Property, plant and equipment, including additions and replace-
ments, is recorded at original cost, including labor, materials, asset
retirement costs and other direct and indirect costs including capi-
talized interest. The cost of repairs and maintenance, including
minor additions and replacements, is charged to expense as
incurred. In 2005, 2004 and 2003, we capitalized interest costs of
$99 million, $70 million and $96 million, respectively.
For electric distribution and transmission property and natural
gas property subject to cost-of-service rate regulation, the depre-
ciable cost of such property, less salvage value, is charged to accu-
mulated depreciation at retirement. Cost of removal collections
from utility customers and expenditures not representing asset
retirement obligations (AROs) are recorded as regulatory liabilities
or regulatory assets.
For generation-related and nonutility property, cost of removal
not associated with AROs is charged to expense as incurred. We
record gains and losses upon retirement of generation-related and
nonutility 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. Our
depreciation rates on utility property, plant and equipment are
as follows:
2005 2004 2003
(percent)
Generation 2.04 1.97 1.83
Transmission 2.25 2.21 2.22
Distribution 3.19 3.19 3.18
Storage 3.15 3.04 2.81
Gas gathering and processing 2.21 2.31 2.39
General and other 5.80 6.03 5.73
Our nonutility property, plant and equipment, excluding explo-
ration and production properties, is depreciated using the straight-
line method over the following estimated useful lives:
Estimated
Asset Useful Lives
Merchant generation — nuclear 29–44 years
Merchant generation — other 6–65 years
General and other 3–25 years
Nuclear fuel used in electric generation is amortized over its
estimated service life on a units-of-production basis.
We follow the full cost method of accounting for gas and oil
exploration and production activities prescribed by the Securities
and Exchange Commission (SEC). Under the full cost method,
all direct costs of property acquisition, exploration and development
activities are capitalized. These capitalized costs are subject to a
quarterly ceiling test. Under the ceiling test, amounts capitalized
are limited 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 permanent write-down of
the assets must be recognized in that period. The ceiling test is
Dominion 2005 63