Dominion Power 2006 Annual Report Download - page 34

develop the estimates of fair value. For individual contracts, the
use of differentvaluation models or assumptionscould have a
material effect on a contract’s estimated fair value.
For cash flow hedges of forecasted transactions, we estimate
the future cash flows of the forecasted transactions and evaluate
the probability of occurrence and timingof such transactions.
Changes in conditions or the occurrence of unforeseen events
could require discontinuance of hedge accounting or could affect
the timingof the reclassification of gainsand/or losses on cash
flow hedges from accumulated other comprehensive income (loss)
(AOCI) into earnings.
USE OFESTIMATES INGOODWILL IMPAIRMENT TESTING
As of December 31, 2006, we reported $4.3 billion of goodwill in
our Consolidated Balance Sheet, a significant portion of which
resulted from the acquisition of Consolidated Natural Gas
Company (CNG) in 2000. Substantially all of this goodwill is
allocated to our Generation, Transmission, Delivery and E&P
reporting units. In April of each year, we test our goodwill for
potential impairment, and perform additional tests more fre-
quently if impairment indicators are present. The 2006, 2005 and
2004 annual tests did not result in the recognition of any good-
will impairment, as the estimated fair values of our reporting units
exceeded their respective carrying amounts.
We estimate thefair value of our reporting units by using a
combination of discounted cash flow analyses, based on our
internal five-year strategic plan, and other valuation techniques
that use multiplesof earnings for peer group companies and
analyses of recent business combinations involving peer group
companies. These calculations are dependent on subjective factors
such as our estimate of future cash flows, the selection of appro-
priate discountand growth rates, and the selectionof peer group
companies and recent transactions. These underlying assumptions
and estimates are made as of apoint in time; subsequent mod-
ifications, particularly changes in discountrates or growth rates
inherent in our estimates of future cash flows, could result in a
future impairment of goodwill. Although we have consistently
applied the same methods in developingthe assumptionsand
estimates that underlie the fair value calculations, such as esti-
mates of future cash flows, and based those estimates on relevant
information available at the time,such cash flow estimates are
highly uncertain by nature and mayvary significantly from actual
results. If the estimates of future cash flows used in the most
recent annual test had been 10% lower, the resulting fair values
would have still been greater than the carrying values of each of
thosereportingunits tested, indicating that no impairment was
present.
USE OFESTIMATES INLONG-LIVED ASSET IMPAIRMENT TESTING
Impairment testing for anindividual or group oflong-lived assets
or for intangible assets with definite livesisrequired when cir-
cumstances indicate those assets may beimpaired.When an
asset’s carrying amount exceeds the undiscountedestimated
future cash flows associated with the asset, the assetisconsidered
impaired to theextent thatthe asset’sfair value is less than its
carrying amount. Performing animpairment test on long-lived
assets involves judgment in areas suchasidentifying circum-
stances thatindicate animpairment mayexist; identifying and
grouping affected assets; anddeveloping the undiscounted and
discounted estimated future cashflows (used toestimate fair
valueintheabsence of market-based value) associatedwith the
asset,including probability weightingsuchcash flows to reflect
expectations about possiblevariations intheir amounts or timing
andthe selection ofanappropriatediscount rate. Although our
cash flow estimates are basedonrelevant information available at
the time the estimates aremade, estimates of future cash flows
are, by nature, highly uncertain and mayvary significantly from
actual results. For example, estimates of future cash flows would
contemplate factors such astheexpected use oftheasset, includ-
ing future production and sales levels, and expected fluctuations
of prices of commodities soldand consumed.
In conjunction with theresults of areview of our portfolio of
assets, the Peaker facilities, with acombined carrying amount of
$504 million, were marketed for sale in the third quarter of 2006.
An impairmentanalysis performed in the third quarter of 2006
indicated that the carrying amount of each of the Peaker facilities
was recoverable as theexpected undiscounted cash flows, proba-
bility weighted to reflect both continued use and possible sale
scenarios, exceeded the carrying amount. In December 2006, we
reached an agreement tosell the Peaker facilities and accordingly,
we reduced their carrying amounts to fair value less cost tosell
and classified them as held forsale in our Consolidated Balance
Sheet. Also in the fourth quarter of 2006, in conjunction with the
review of our assets, adecision was made to no longer pursue the
development of agastransmission pipeline project withcap-
italized construction costs of $28 million. The pipeline project
was previously tested forimpairment during 2005. The results of
our analysis in 2005 indicated that this asset was not impaired.
Impairment charges of $280 million ($181 million after-tax) were
recorded in December 2006 related to the Peaker facilities and
the transmission pipeline project.
Also in 2006, a natural gas-fired merchant generation facility
project, with acarrying amount of $460 million, was tested for
impairment. The results of our analysis indicated that this carry-
ing amount, as well as theestimated cost to complete, were recov-
erable.
In 2005, we tested a group of gas and steam electric turbines
held for future development with acarrying amount of $187 mil-
lion for impairment. The results of our analysis indicated that this
carrying amount was recoverable. In 2004, we did not test any
significant long-lived assetsor asset groups for impairment as no
circumstances arose that indicated an impairmentmayexist.
ASSET RETIREMENT OBLIGATIONS
We recognize liabilitiesfortheexpected cost of retiring tangible
long-lived assets forwhich alegal obligation exists. These asset
retirement obligations(AROs)arerecognized at fair value as
incurred, and are capitalizedaspart of the cost of the related long-
lived assets. In the absence of quoted market prices, we estimate
the fair value of our AROs using present value techniques, in
which we make various assumptions including estimates of the
amounts and timing of future cash flows associated with retire-
ment activities, credit-adjusted risk free rates and cost escalation
rates. AROs currently reported in our Consolidated Balance
Sheets were measured during a period of historically low interest
rates. The impact on measurements of new AROs or remeasure-
ments of existing AROs, using different rates in the future,may
be significant. When we revise any assumptions used to calculate
the fair value of existing AROs, we adjust the carrying amount of
both theAROliability and the related long-lived asset.We
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