Dominion Power 2006 Annual Report Download - page 36

ACCOUNTING FOR REGULATED OPERATIONS
The accounting forour regulated electric and gas operations dif-
fers from the accounting fornonregulated operationsin that we
are required to reflect the effect of rate regulation in our Con-
solidated Financial Statements. For regulated businesses subject to
federal or state cost-of-service rate regulation, regulatory practices
that assigncosts to accounting periods maydiffer from account-
ing methods generally applied by nonregulated companies. When
it is probablethat regulatorswill permit the recovery of current
costs through future ratescharged to customers, we defer these
costs as regulatoryassetsthat otherwise would be expensed by
nonregulated companies. Likewise, we recognize regulatory
liabilities when it is probablethat regulatorswill require customer
refundsthrough future ratesandwhen revenue is collected from
customers forexpenditures that are not yet incurred. Regulatory
assetsare amortizedinto expense and regulatory liabilities are
amortized into income overtherecovery period authorized by the
regulator.
We evaluate whether or not recovery of our regulatoryassets
through future ratesisprobableand make various assumptionsin
our analyses. The expectations of future recovery are generally
based on orders issued by regulatorycommissions or historical
experience, as well as discussions with applicable regulatory
authorities. If recovery of aregulatory asset is determined to be
less than probable, it will be writtenoffin the period such assess-
ment is made. In 2006, $166 million of our regulatory assets were
written off as aresult of the pending sale of Peoples and Hope
since the recovery of thoseassets is no longer probable. We cur-
rently believe the recovery of our remaining regulatory assets is
probable. See Notes 2and 14 to our Consolidated Financial
Statements.
ACCOUNTING FOR GAS ANDOIL OPERATIONS
We follow the full cost method of accounting forgas and oil E&P
activities prescribed by the Securities and Exchange Commission
(SEC). Under the full cost method, alldirect costsof property
acquisition, exploration and development activities are capitalized
and subsequently depleted using the units-of-production method.
The depletable base of costs includes estimated future costs to be
incurred in developingproved gas and oil reserves, as well as cap-
italized asset retirement costs, net of projected salvage values.
Capitalized costs in the depletable base are subject toaceiling test
prescribed by the SEC. The test limitscapitalized amounts to a
ceiling—the present value of estimated future netrevenues to be
derived from the productionofproved gasand oil reserves,
assumingperiod-end pricing adjusted forany cash flow hedges in
place. We perform the ceiling test quarterly, on a
country-by-country basis, and would recognize asset impairments
to the extent that total capitalized costs exceed the ceiling. In
addition, gainsor losses on the sale or other disposition of gasand
oil properties are not recognized, unless the gain or loss would
significantly alter the relationship between capitalized costs and
proved reservesof natural gas and oil attributabletoacountry.
Our estimate of proved reservesrequires alarge degree of
judgment and is dependent on factors such as historical data,
engineering estimates of proved reserve quantities, estimates of the
amount and timingoffuture expenditures to develop the proved
reserves, and estimates of future production from the proved
reserves. Our estimated proved reservesas of December 31, 2006
are basedupon studies foreach of our properties prepared by our
staff engineers and audited by Ryder Scott Company, L.P. Calcu-
lations were prepared using standard geological and engineering
methods generally accepted by the petroleumindustry and in
accordance with SECguidelines. Given the volatilityof natural
gas and oil prices, it is possible that our estimate of discounted
future netcash flows from proved natural gasand oil reservesthat
is used to calculate the ceiling could materially change in the
near-term.
The process to estimate reservesis imprecise, and estimates are
subject torevision. If there is a significant variance in anyof our
estimates or assumptionsin the future and revisions to the value
of our proved reservesare necessary, related depletion expense and
the calculation of the ceiling test would be affected and recog-
nition of natural gas and oil property impairments could occur.
See Notes 2and 29 to our Consolidated Financial Statements.
INCOME TAXES
Judgment and the use of estimates are required in developingthe
provision for income taxesandreportingoftax-related assets and
liabilities.The interpretation of taxlaws involves uncertainty,
since tax authorities may interpret the laws differently. Ultimate
resolution of income taxmatters mayresult in favorableor
unfavorable impacts to net income and cash flows and adjust-
ments to tax-related assets and liabilities could be material.
Through December 31, 2006, we have established liabilities
fortax-related contingencies in accordance with Statement of
Financial Accounting Standards (SFAS) No. 5, Accounting for
Contingencies, and reviewed them in light of changing facts and
circumstances. However, as discussed in Note 4to our Con-
solidated Financial Statements, effective January 1, 2007, we
adopted Financial Accounting Standards Board (FASB) Inter-
pretationNo. 48, Accounting forUncertainty in Income Taxes
(FIN 48). Taking into consideration the uncertainty and judg-
ment involved in the determination and filing of income taxes,
FIN 48 establishes standards forrecognition and measurement, in
financial statements,ofpositions taken, or expected to be taken,
by an entity in its income taxreturns. Positions taken by an entity
in its income taxreturns that are recognized in the financial
statements must satisfy amore-likely than-not recognition
threshold, assuming that the position will be examined by taxing
authorities with full knowledge of all relevant information.
Deferred income taxassets and liabilities are provided, repre-
senting future effects on income taxesfortemporary differences
between the bases of assetsand liabilities forfinancial reporting
and tax purposes. We evaluate quarterly the probability ofrealiz-
ing deferred taxassets by reviewing aforecast of future taxable
income and the availability of taxplanning strategies that can be
implemented, if necessary, to realize deferred taxassets. Failure to
achieve forecasted taxable income or successfully implement tax
planning strategies may affect the realization of deferred taxassets.
Other
ACCOUNTING STANDARDS
During 2006, 2005 and 2004, we were required to adopt several
new accounting standards, which are discussedinNote 3to our
Consolidated Financial Statements. Our adoption of SFAS
No. 158,Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans on December 31, 2006 affected the
comparability of our Consolidated Balance Sheet at
December 31, 2006 to prior periods. Under SFAS No. 158, our
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