Dominion Power 2006 Annual Report Download - page 68

Gas and oil production revenue is recognized based on actual
volumes of gas and oil soldtopurchasers. Sales require delivery
of the product tothepurchaser, passage of title and probability
of collection of purchaser amounts owed. Gasand oil pro-
ductionrevenue includessales of Company produced gas,oil,
condensate and the recognition of revenue previouslydeferred
in connection with thevolumetric production payment(VPP)
transactions described in Note 12. Gasand oil production
revenue is reported net of royalties. We use the sales methodof
accounting forgas imbalances.An imbalance is created when
Company volumes of gassold pertaining to a property do not
equate to the volumes to which we are entitled based on our
interest in the property. A liability is recognized when our
excess sales over entitled volumes exceeds our net remaining
property reserves; and
Other revenue consists primarilyofmiscellaneous service rev-
enue from electric and gasdistribution operations; gas and oil
processing and handling revenue;revenuesfrom DCI oper-
ations; and business interruption insurance revenueassociated
with delayed gas and oil production caused by hurricanes.
Electric Fuel, Purchased Energy and Purchased Gas—
Deferred Costs
Where permitted by regulatoryauthorities, the differences
between actual electric fuel, purchased energy and purchased gas
expenses and the related levels of recovery forthese expenses in
current rates are deferred and matched against recoveries in future
periods. The deferral of costs in excess of current period fuel rate
recovery is recognized as aregulatory asset, while rate recovery of
fuel rate revenue in excess of current period expenses is recognized
as aregulatoryliability.
For electric fueland purchased energy expenses, effective Jan-
uary 1, 2004, the fuel factor provisions forour Virginiaretail
customers were locked in until July1, 2007. Effective July 1,
2007 the fuel factor will be adjustedas discussed under Virginia
Fuel Expenses in Note 23. Approximately 7.5% of the cost of fuel
used in electric generation and energy purchases used to serve
utility customers is currently subject todeferral accounting.
Deferred costs associated with the Virginia jurisdictional portion
of expenditures incurred through 2003 continue to be reported as
aregulatory asset,which is expected to be recovered by July 1,
2007.
Income Taxes
We fileaconsolidated federal income taxreturn forDominion
and its subsidiaries. Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes,requires an asset
and liability approach to accounting for income taxes. Deferred
income taxassetsand liabilities are provided, representing future
effects on income taxesfortemporary differences between the
bases of assets and liabilities for financial reporting and taxpur-
poses. Where permitted by regulatoryauthorities, the treatment
of temporary differences may differ from the requirements of
SFAS No. 109. Accordingly, a regulatoryasset is recognized if it is
probablethat future revenues will be providedforthepayment of
deferred taxliabilities. We establish a valuation allowance whenit
is more likely than not that all, or aportion, of adeferred taxasset
will not be realized. Deferred investment taxcredits are amortized
over the service lives of the properties giving rise to the credits.
Stock-based Compensation
Effective January 1, 2006, we measure and recognize compensa-
tion expense in accordance with SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123R), which requires that
compensation expense relating to share-based payment trans-
actions be recognized in the financial statements based on the fair
value of the equity or liability instruments issued. We adopted
SFAS No. 123R using the modified prospective application tran-
sition method. Under this transition method, compensation cost
is recognized (a) based on the requirements of SFAS No. 123R
forall share-based awardsgranted subsequent to January 1, 2006
and (b) based on the original provisions of SFASNo. 123,
Accounting for Stock-Based Compensation,forallawards granted
prior to January 1, 2006, but not vested as of that date. Results
forprior periods were not restated.
Prior to January 1, 2006, we accounted for our stock-based
compensation plans under the measurement and recognition
provisions of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees,andrelated
interpretations. Under this method, stock option awards generally
did not result in compensation expense, since their exercise price
was typically equal to the marketprice of our common stock on
the date of grant. Accordingly, stock-based compensation expense
was included as a pro forma disclosure in the footnotes to our
financial statements.
The following table illustratestheproforma effect on net
income and earnings per share (EPS), if we had applied the fair
value recognition provisions of SFASNo. 123 to stock-based
employee compensation:
Year Ended December 31, 2005 2004
(millions, except per shareamounts)
Net income—as reported $1,033 $1,249
Add: actual stock-based compensation expense, net
of tax(1) 15 10
Deduct: pro forma stock-based compensation
expense, net of tax (16) (20)
Net income—pro forma $1,032 $1,239
Basic EPS—as reported $3.02 $ 3.80
Basic EPS—pro forma 3.02 3.77
Diluted EPS—as reported 3.00 3.78
Diluted EPS—pro forma 3.00 3.75
(1) Actual stock-based compensation expense primarily relates to restricted stock.
Prior to the adoption of SFAS No. 123R, we presented the
benefits of taxdeductions resulting from the exercise of stock-
based compensation as an operatingcash flow in our Con-
solidated Statements of Cash Flows. SFAS No. 123R requires the
benefits of taxdeductions in excess of the compensation cost
recognized for stock-based compensation (excess taxbenefits) to
be classifiedasafinancing cash flow. In accordance with FASB
Staff Position No. FAS 123(R)-3, Transition Election Related to
Accounting forthe Tax Effects ofShare-Based Payment Awards,we
have elected to use the simplified methodto determine the impact
of employee stock option awards that were fully vested and out-
standing upon the adoption of SFASNo. 123R. During the year
ended December 31, 2006, we realized $1 million of excess tax
benefits from restricted stock awards that vested during 2006 and
$7 million of taxbenefits related to the exercise of employee stock
DOMINION2006 Annual Report 67