Dominion Power 2005 Annual Report Download - page 66

Notes to Consolidated Financial Statements, Continued
performed separately for each cost center, with cost centers estab-
lished on a country-by-country basis. Approximately 10% of our
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,
2005. Future cash flows associated with settling AROs that have
been accrued on our Consolidated Balance Sheets pursuant to
SFAS No. 143, Accounting for Asset Retirement Obligations, are
excluded from our 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 capitalized asset retirement costs, net of
projected salvage values. The costs of investments in unproved
properties are initially excluded from the depreciable base. Until the
properties are evaluated, a ratable portion of the capitalized costs
is periodically reclassified to the depreciable base, determined 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.
Emissions Allowances
Emissions allowances are issued by the Environmental Protection
Agency (EPA) and permit the holder of the allowance to emit certain
gaseous by-products of fossil fuel combustion, including sulfur diox-
ide (SO2) and nitrogen oxide (NOx). Allowances may be transacted
with third parties or consumed as these emissions are generated.
Allowances allocated to or acquired by our generation and LNG
operations are held primarily for consumption. Allowances acquired
by our trading and risk management operations are held primarily
for the purpose of resale to third parties.
Allowances Held for Consumption
Allowances held for consumption are classified as intangible assets
which are included in other assets on our Consolidated Balance
Sheets. Carrying amounts are based upon our cost to acquire the
allowances, or in the case of a business combination, the fair val-
ues assigned to them in our allocation of the purchase price of the
acquired business. Allowances issued directly to us by the EPA are
carried at zero cost.
These allowances are amortized in the periods they are con-
sumed with the amortization reflected in depreciation, depletion
and amortization expense on our Consolidated Statements of
Income. We report purchases and sales of these allowances as
investing activities on our Consolidated Statements of Cash Flows
and gains or losses resulting from sales in other operations and
maintenance expense on our Consolidated Statements of Income.
Allowances Held for Resale
Allowances held for resale are classified as materials and supplies
inventory on our Consolidated Balance Sheets. Carrying amounts
are based upon our cost to acquire the allowances.
These allowances are not consumed and therefore are not sub-
ject to amortization. We report purchases and sales of these
allowances as operating activities on our Consolidated Statements
of Cash Flows. Sales of these allowances are reported in operating
revenue and purchases of allowances are reported in other energy-
related commodity purchases expense on our Consolidated State-
ments of Income.
Goodwill and Intangible Assets
We evaluate 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 or as consumed.
Impairment of Long-Lived and Intangible Assets
We perform 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
regulation, 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
permit the recovery of current costs through future rates charged to
customers, we defer these costs as regulatory assets that other-
wise would be expensed by nonregulated companies. Likewise, we
recognize regulatory liabilities when it is probable that regulators will
require customer refunds through future rates and when revenue is
collected from customers for expenditures that are not yet incurred.
Regulatory assets are amortized into expense and regulatory liabili-
ties are amortized into income over the recovery period authorized
by the regulator.
Asset Retirement Obligations
We recognize AROs at fair value as incurred or when sufficient infor-
mation becomes available to determine a reasonable estimate of
the fair value of the retirement activities to be performed. These
amounts are capitalized as costs of the related tangible long-lived
assets. Since relevant market information is not available, we esti-
mate fair value using discounted cash flow analyses. We report the
accretion of the AROs due to the passage of time in other opera-
tions and maintenance expense.
Amortization of Debt Issuance Costs
We defer and amortize debt issuance costs and debt premiums or
discounts over the expected lives of the respective debt issues,
considering maturity dates and, if applicable, redemption rights
held by others. As permitted by regulatory authorities, gains or
losses resulting from the refinancing of debt allocable to utility
operations subject to cost-based rate regulation have also been
deferred and are amortized over the lives of the new issues.
64 Dominion 2005