Dominion Power 2006 Annual Report Download - page 71

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
of $120 million, $99 million and$70million, respectively. In
2006, 2005 and 2004, for electric distribution, electric trans-
missionandnatural gas property subject to cost-of-service utility
rate regulation, we capitalized an allowance forfundsused during
construction of $14 million, $4 million and$4million,
respectively.
For electric distribution, electric transmission and natural gas
property subject to cost-of-service rate regulation, the depreciable
cost of such property, less salvage value,ischarged to accumulated
depreciation at retirement. Cost of removal collections from
utility customers and expenditures not representing asset retire-
ment obligations (AROs)arerecorded as regulatory liabilities or
regulatoryassets.
For generation-related and nonutility property,cost of removal
not associated with AROs is charged to expense as incurred. We
record gainsand losses upon retirementof generation-related and
nonutility property based upon the difference between proceeds
received, if any, and the property’s net book value at the retire-
ment 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:
2006 2005 2004
(percent)
Generation 2.07 2.04 1.97
Transmission 2.28 2.25 2.21
Distribution 3.28 3.19 3.19
Storage 3.10 3.15 3.04
Gas gathering andprocessing 2.05 2.21 2.31
General andother 5.22 5.80 6.03
Our nonutility property, plant and equipment, excluding
E&P properties, is depreciated using the straight-line method
over the following estimated useful lives:
Asset
Estimated Useful
Lives
Merchant generation—nuclear 29 –44 years
Merchant generation—other 6–40years
General andother 3–25years
Nuclear fuel used in electric generation is amortized over its
estimated service life on aunits-of-production basis. We report
the amortization of nuclear fuel in electricfuel and energy pur-
chases expense in our Consolidated Statements of Income and in
depreciation, depletion and amortization in our Consolidated
Statements of Cash Flows.
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 costs
of property acquisition, exploration and development activities are
capitalized. These capitalized costs are subject toaquarterly ceil-
ing test. Under the ceiling test, amounts capitalized are limitedto
the present value of estimated future netrevenues to be derived
from the anticipated production of proved gasand oil reserves,
assumingperiod-end pricing adjusted forcash flow hedges in
place. If net capitalized costs exceed the ceiling test at the end of
any quarterly period, then apermanent write-down of the assets
must be recognized in that period. The ceiling test is performed
separately for each cost center, with cost centers established on a
country-by-country basis. Approximately 8% of our anticipated
productionis hedged by qualifying cash flow hedges, forwhich
hedge-adjusted prices were used to calculate estimated future net
revenue.Whetherperiod-end market prices or hedge-adjusted
prices were used for the portionof production that is hedged,
there was no ceiling test impairment as of December 31, 2006.
Future cash flows associated with settling AROs that have been
accrued in our Consolidated Balance Sheets pursuant toSFAS
No. 143, Accounting for AssetRetirement Obligations,areexcluded
from our calculations under the full cost ceiling test.
Depletion of gas and oil producing properties is computed
using the units-of-production method. Under the full cost meth-
od, the depletable base of costs subject todepletion also includes
estimated future costs to be incurred in developingproved gas
and oil reserves, as well as capitalized asset retirement costs, net of
projected salvage values. The costs of investments in unproved
properties including associated exploration-related costs are ini-
tially excluded from the depletable base. Until the properties are
evaluated, a ratable portionof the capitalized costs is periodically
reclassified to the depletable base, determined on a property by
property basis, over terms of underlying leases. Once a property
has been evaluated, any remaining capitalized costs are thentrans-
ferred to the depletable base. In addition, gainsor losses on the
sale or other disposition of gasand oil properties are not recog-
nized, unless the gain or loss would significantly alter the relation-
ship between capitalized costs and proved reservesof natural gas
and oil attributable to acountry.
Emissions Allowances
Emissions allowances are issued by the Environmental Protection
Agency (EPA) and permit the holderof the allowance to emit
certain gaseous by-products of fossil fuel combustion, including
sulfur dioxide (SO2)andnitrogen oxide (NOx). Allowances may
be transactedwith third parties or consumed as theseemissions
are generated. Allowances allocated to or acquired by our gen-
eration andLNGoperations are held primarily forconsumption.
Allowances acquired by our energy marketing operations are held
forthe purpose of resale to third parties.
ALLOWANCES HELD FOR CONSUMPTION
Allowances held forconsumption are classifiedasintangible assets
in our Consolidated Balance Sheets. Carrying amounts are based
on our cost toacquire the allowances or, in the case of abusiness
combination, on the fair values assigned to them in our allocation
of the purchaseprice of the acquired business. Allowances issued
directly to us by the EPA are carriedatzero cost.
These allowances are amortized in the periodsthey are con-
sumed with the amortization reflected in depreciation, depletion
and amortization expense in our Consolidated Statements of
Income. We report purchases and sales of these allowances as
investing activities in our Consolidated Statements of Cash Flows
and gainsor losses resulting from sales in other operations and
maintenance expense in our Consolidated Statements of Income.
ALLOWANCES HELD FOR RESALE
Allowances held forresale are classifiedasmaterials and supplies
inventory in our Consolidated Balance Sheets and valued at the
lower of cost or market.
These allowances are not consumed and therefore are not
subject toamortization. We report purchases and sales of these
allowances as operatingactivities in our Consolidated Statements
70 DOMINION2006 Annual Report