Dominion Power 2007 Annual Report Download - page 73

of employee stock option awards that were fully vested and out-
standing upon the adoption of SFAS No. 123R. During the years
ended December 31, 2007 and 2006, we realized $46 million and
$8 million, respectively, of excess tax benefits from the vesting of
restricted stock awards and exercise of employee stock options.
Such amounts are reported as a financing cash flow.
Restricted stock awards granted prior to January 1, 2006
contain terms that accelerate vesting upon retirement. Our pre-
vious practice was to recognize compensation cost for these
awards over the stated vesting term unless vesting was actually
accelerated by retirement. Following our adoption of SFAS
No. 123R, we continue to recognize compensation cost over the
stated vesting term for existing restricted stock awards, but we are
now required to recognize compensation cost over the shorter of:
(1) the stated vesting term or (2) the period from the date of grant
to the date of retirement eligibility for newly issued or modified
restricted stock awards with similar terms. In the years ended
December 31, 2007 and 2006, we recognized approximately $3
million and $5 million, respectively, of compensation cost related
to awards previously granted to retirement eligible employees. At
December 31, 2007, unrecognized compensation cost for these
restricted stock awards held by retirement eligible employees
totaled approximately $1 million.
Cash and Cash Equivalents
Current banking arrangements generally do not require checks to
be funded until they are presented for payment. At December 31,
2007 and 2006, accounts payable included $93 million and $125
million, respectively, of checks outstanding but not yet presented
for payment. For purposes of our Consolidated Statements of
Cash Flows, we consider cash and cash equivalents to include cash
on hand, cash in banks and temporary investments purchased
with an original maturity of three months or less.
Inventories
Inventory is carried at the lower of cost or market (LOCOM).
Materials and supplies and fossil fuel inventories are valued pri-
marily using the weighted-average cost method. Stored gas
inventory used in local gas distribution operations is valued using
the last-in-first-out (LIFO) method. Under the LIFO method,
those inventories were valued at $8 million at December 31, 2007
and 2006. Based on the average price of gas purchased during
2007, the cost of replacing the current portion of stored gas
inventory exceeded the amount stated on a LIFO basis by approx-
imately $152 million. Stored gas inventory held by certain non-
regulated gas operations is valued using the weighted-average cost
method.
Gas Imbalances
Natural gas imbalances occur when the physical amount of natu-
ral gas delivered from or received by a pipeline system or storage
facility differs from the contractual amount of natural gas deliv-
ered or received. We value these imbalances due to, or from,
shippers and operators at an appropriate index price at period
end, subject to the terms of our tariff for regulated entities.
Imbalances are primarily settled in-kind. Imbalances due to us
from other parties are reported in other current assets and
imbalances that we owe to other parties are reported in other
current liabilities in our Consolidated Balance Sheets.
Derivative Instruments
We use derivative instruments such as futures, swaps, forwards,
options and FTRs to manage the commodity, currency exchange
and financial market risks of our business operations.
SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, requires all derivatives, except those for which
an exception applies, to be reported in our Consolidated Balance
Sheets at fair value. Derivative contracts representing unrealized
gain positions and purchased options are reported as derivative
assets. Derivative contracts representing unrealized losses and
options sold are reported as derivative liabilities. One of the
exceptions to fair value accounting—normal purchases and nor-
mal sales—may be elected when the contract satisfies certain cri-
teria, including a requirement that physical delivery of the
underlying commodity is probable. Expenses and revenues result-
ing from deliveries under normal purchase contracts and normal
sales contracts, respectively, are included in earnings at the time of
contract performance.
As part of our overall strategy to market energy and manage
related risks, we manage a portfolio of commodity-based
derivative instruments held for trading purposes. We use estab-
lished policies and procedures to manage the risks associated with
price fluctuations in these energy commodities and use various
derivative instruments to reduce risk by creating offsetting market
positions.
We also hold certain derivative instruments that are not held
for trading purposes and are not designated as hedges for account-
ing purposes. However, to the extent we do not hold offsetting
positions for such derivatives, we believe these instruments repre-
sent economic hedges that mitigate our exposure to fluctuations
in commodity prices, interest rates and foreign exchange rates.
Statement of Income Presentation:
‰Derivatives Held for Trading Purposes: All changes in fair
value, including amounts realized upon settlement, are pre-
sented in revenue on a net basis as nonregulated electric sales,
nonregulated gas sales or other energy-related commodity
sales.
‰Financially-Settled Derivatives—Not Held for Trading
Purposes and Not Designated as Hedging Instruments: All
unrealized changes in fair value and settlements are presented
in other operations and maintenance expense on a net basis.
‰Physically-Settled Derivatives—Not Held for Trading
Purposes and Not Designated as Hedging Instruments: All
unrealized changes in fair value and settlements for physical
derivative sales contracts are presented in revenues, while all
unrealized changes in fair value and settlements for physical
derivative purchase contracts are presented in expenses.
We recognize revenue or expense from all non-derivative
energy-related contracts on a gross basis at the time of contract
performance, settlement or termination.
Following the reapplication of SFAS No. 71 to the Virginia
jurisdiction of our utility generation operations, for jurisdictions
subject to cost-based regulation, changes in the fair value of these
derivative instruments result in the recognition of regulatory
assets or regulatory liabilities. Realized gains or losses on the
derivative instruments are generally recognized when the related
transactions impact earnings.
Dominion 2007 Annual Report 71