Dominion Power 2007 Annual Report Download - page 75

value are included in other income and unrealized gains are
reported as a component of AOCI, net of tax. We continue to
report all other available-for-sale securities at fair value with real-
ized gains and losses and any other-than-temporary declines in
fair value included in other income and unrealized gains and
losses reported as a component of AOCI, net of tax.
We analyze all securities classified as available-for-sale to
determine whether a decline in fair value should be considered
other than temporary. We use several criteria to evaluate other-
than-temporary declines, including the length of time over which
the market value has been lower than its cost, the percentage of
the decline as compared to its cost and the expected fair value of
the security. In addition, retained interests from securitizations of
financial assets are first evaluated in accordance with Emerging
Issues Task Force (EITF) Issue No. 99-20, Recognition of Interest
Income and Impairments of Purchased and Retained Beneficial
Interests in Securitized Financial Assets. If a decline in fair value of
any security is determined to be other than temporary, the secu-
rity is written down to its fair value at the end of the reporting
period.
Our method of assessing other-than-temporary declines
requires demonstrating the ability to hold individual securities for
a period of time sufficient to allow for the anticipated recovery in
their market value prior to the consideration of the other criteria
mentioned above. Since regulatory authorities limit our ability to
oversee the day-to-day management of our nuclear
decommissioning trust fund investments, we do not have the abil-
ity to hold individual securities in the trusts. Accordingly, we
consider all securities held by our nuclear decommissioning trusts
with market values below their cost bases to be other-than-
temporarily impaired.
Property, Plant and Equipment
Property, plant and equipment, including additions and replace-
ments is recorded at original cost, consisting of labor and materi-
als and other direct and indirect costs such as asset retirement
costs, capitalized interest and, for certain operations subject to
cost of service rate regulation, an allowance for funds used during
construction (AFUDC). The cost of repairs and maintenance,
including minor additions and replacements, is charged to
expense as it is incurred. In 2007, 2006 and 2005, we capitalized
interest costs and AFUDC of $103 million, $134 million and
$103 million, respectively. Upon reapplication of SFAS No. 71 to
the Virginia jurisdiction of our utility generation operations in
April 2007, we discontinued capitalizing interest on utility
generation-related construction projects since the Virginia State
Corporation Commission (Virginia Commission) previously
allowed for current recovery of construction financing costs.
For property subject to cost-of-service rate regulation, includ-
ing electric distribution, electric transmission, utility generation
property effective April 2007, and certain natural gas property,
the undepreciated cost of such property, less salvage value, is
charged to accumulated depreciation at retirement. Cost of
removal collections from utility customers and expenditures not
representing asset retirement obligations (AROs) are recorded as
regulatory liabilities or regulatory assets.
For property that is not subject to cost-of-service rate regu-
lation, including nonutility property and utility generation prop-
erty prior to the reapplication of SFAS No. 71 to the Virginia
jurisdiction of our utility generation operations in April 2007,
cost of removal not associated with AROs is charged to expense as
incurred. We also record gains and losses upon retirement based
upon the difference between the proceeds received, if any, and the
property’s net book value at the retirement 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:
Year Ended December 31, 2007 2006 2005
(percent)
Generation (1) 2.24 2.07 2.04
Transmission 2.26 2.28 2.25
Distribution 3.21 3.28 3.19
Storage 2.78 3.10 3.15
Gas gathering and processing 2.09 2.05 2.21
General and other 4.92 5.22 5.80
(1) In October 2007, we revised the depreciation rates for our utility gen-
eration assets to reflect the resultsofanewdepreciationstudy,which
incorporates the property, plant and equipment accounting policy changes
that were made upon the reapplication of SFAS No. 71, as well as updates
to other assumptions. This change is expected to increase annual deprecia-
tion expense by approximately $54 million ($33 million after-tax).
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 6–40 years
General and other 3–25 years
Nuclear fuel used in electric generation is amortized over its
estimated service life on a units-of-production basis. We report
the amortization of nuclear fuel in electric fuel 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 for gas and oil
E&P activities prescribed by the Securities and Exchange
Commission (SEC). Under the full cost method, all direct costs
of property acquisition, exploration and development activities are
capitalized. These capitalized costs are subject to a quarterly ceil-
ing test. Under the ceiling test, amounts capitalized are limited to
the present value of estimated future net revenues to be derived
from the anticipated production of proved gas and oil reserves,
discounted at 10 percent, assuming period-end pricing adjusted
for cash flow hedges in place. If net capitalized costs exceed the
ceiling test at the end of any quarterly period, then a permanent
write-down of the assets must be recognized in that period.
Approximately 6% of our anticipated production is hedged by
qualifying cash flow hedges, for which hedge-adjusted prices were
used to calculate estimated future net revenue. Whether
period-end market prices or hedge-adjusted prices were used for
the portion of production that is hedged, there was no ceiling test
impairment as of December 31, 2007. Future cash flows asso-
ciated with settling AROs that have been accrued in our Con-
solidated Balance Sheets pursuant to SFAS No. 143, are excluded
from our calculations under the full cost ceiling test.
Dominion 2007 Annual Report 73