Dominion Power 2007 Annual Report Download - page 37

between capitalized costs and proved reserves of natural gas and
oil attributable to a country. In 2007, we recognized gains from
the sales of our Canadian and U.S. non-Appalachian E&P busi-
nesses. See Note 6 to our Consolidated Financial Statements.
Our estimate of proved reserves requires a large degree of
judgment and is dependent on factors such as historical data,
engineering estimates of proved reserve quantities, estimates of the
amount and timing of future expenditures to develop the proved
reserves, and estimates of future production from the proved
reserves. Our estimated proved reserves as of December 31, 2007
are based upon studies for each 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 petroleum industry and in
accordance with SEC guidelines. Given the volatility of natural
gas and oil prices, it is possible that our estimate of discounted
future net cash flows from proved natural gas and oil reserves that
is used to calculate the ceiling could materially change in the
near-term.
The process to estimate reserves is imprecise, and estimates are
subject to revision. If there is a significant variance in any of our
estimates or assumptions in the future and revisions to the value
of our proved reserves are 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 2 and 30 to our Consolidated Financial Statements.
I
NCOME T AXES
Judgment and the use of estimates are required in developing the
provision for income taxes and reporting of tax-related assets and
liabilities. The interpretation of tax laws involves uncertainty,
since tax authorities may interpret the laws differently. Ultimate
resolution of income tax matters may result in favorable or
unfavorable impacts to net income and cash flows and adjust-
ments to tax-related assets and liabilities could be material.
Prior to 2007, we established liabilities for tax-related con-
tingencies when we believed it was probable that a liability had
been incurred and the amount could be reasonably estimated in
accordance with SFAS No. 5, Accounting for Contingencies, and
subsequently reviewed them in light of changing facts and circum-
stances. However, as discussed in Note 3 to our Consolidated
Financial Statements, effective January 1, 2007, we adopted
Financial Accounting Standards Board (FASB) Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (FIN 48).
Taking into consideration the uncertainty and judgment involved
in the determination and filing of income taxes, FIN 48 establishes
standards for recognition and measurement, in financial state-
ments, of positions taken, or expected to be taken, by an entity in
its income tax returns. Positions taken by an entity in its income
tax returns that are recognized in the financial statements must
satisfy a more-likely-than-not recognition threshold, assuming that
the position will be examined by tax authorities with full knowl-
edge of all relevant information. If we take or expect to take a tax
return position that is not recognized in the financial statements,
we disclose such amount as an unrecognized tax benefit. At
December 31, 2007 we had $407 million of unrecognized tax
benefits. For the majority of our unrecognized tax benefits, the
ultimate deductibility is highly certain, but there is uncertainty
about the timing of such deductibility.
Deferred income tax assets and liabilities are provided, repre-
senting future effects on income taxes for temporary differences
between the bases of assets and liabilities for financial reporting
and tax purposes. We evaluate quarterly the probability of realiz-
ing deferred tax assets by reviewing a forecast of future taxable
income and the availability of tax planning strategies that can be
implemented, if necessary, to realize deferred tax assets. Failure to
achieve forecasted taxable income or successfully implement tax
planning strategies may affect the realization of deferred tax assets.
We establish a valuation allowance when it is more likely than not
that all, or a portion of, a deferred tax asset will not be realized. At
December 31, 2007, we had established $23 million of valuation
allowances on our deferred tax assets associated with loss
carryforwards.
Other
A CCOUNTING S TANDARDS
During 2007, 2006 and 2005, we were required to adopt several
new accounting standards, which are discussed in Note 3 to our
Consolidated Financial Statements. See Note 4 to our Con-
solidated Financial Statements for a discussion of recently issued
accounting standards that will be adopted in the future.
R ESULTS OF O PERATIONS
Presented below is a summary of our consolidated results:
Year Ended
December 31, 2007 $ Change 2006 $ Change 2005
(millions, except EPS)
Net Income $2,539 $1,159 $1,380 $ 347 $1,033
Diluted earnings
per share (EPS)(1) 3.88 1.92 1.96 0.46 1.50
(1) All per share amounts have been adjusted to reflect a two-for-one stock
split distributed in November 2007.
Overview
2007 VS . 2006
Net income increased by 84% to $2.5 billion. Diluted EPS
increased to $3.88 and includes $0.24 of share accretion resulting
from the repurchase of shares with proceeds received from the sale
of our non-Appalachian E&P business. Favorable drivers include
a gain on the sale of our non-Appalachian E&P business, higher
realized prices for our gas and oil production, higher margins at
our merchant generation business and the reinstatement of annual
fuel rate adjustments, effective July 1, 2007, for the Virginia
jurisdiction of our utility generation operations, with deferred fuel
accounting for over- or under-recoveries of fuel costs. Unfavorable
drivers include a decrease in gas and oil production due to the sale
of our non-Appalachian E&P business, an impairment charge
related to the sale of Dresden, an extraordinary charge in con-
nection with the reapplication of SFAS No. 71 to the Virginia
jurisdiction of our utility generation operations, charges related to
the early extinguishment of outstanding debt associated with the
completion of our debt tender offer in July 2007, a charge due to
the discontinuance of hedge accounting for certain gas and oil
derivatives and subsequent changes in the fair value of these
derivatives as a result of the sale of our non-Appalachian E&P
Dominion 2007 Annual Report 35