Dominion Power 2007 Annual Report Download - page 76

Notes to Consolidated Financial Statements, Continued
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 to depletion also includes
estimated future costs to be incurred in developing proved 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 portion of 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 then trans-
ferred to the depletable base. In addition, gains or losses on the
sale or other disposition of gas and oil properties are not recog-
nized, unless the gain or loss would significantly alter the relation-
ship 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
businesses. See Note 6 to our Consolidated Financial Statements.
Emissions Allowances
Emissions allowances are issued by the Environmental Protection
Agency (EPA) and permit the holder of the allowance to emit
certain gaseous by-products of fossil fuel combustion, including
sulfur dioxide (SO2) and nitrogen oxide (NOx). Allowances may
be transacted with third parties or consumed as these emissions
are generated. Allowances allocated to or acquired by our gen-
eration operations are held primarily for consumption. Allow-
ances acquired by our energy marketing operations are held for
the purpose of resale to third parties.
A
LLOWANCES H ELD FOR C ONSUMPTION
Allowances held for consumption are classified as intangible assets
in our Consolidated Balance Sheets. Carrying amounts are based
on our cost to acquire the allowances or, in the case of a business
combination, on the fair values assigned to them in our allocation
of the purchase price of the acquired business. Allowances issued
directly to us by the EPA are carried at zero cost.
These allowances are amortized in the periods the emissions
are generated, with the amortization reflected in depreciation,
depletion and amortization expense in our Consolidated State-
ments of Income. We report purchases and sales of these allow-
ances as investing activities in our Consolidated Statements of
Cash Flows and gains or losses resulting from sales in other oper-
ations and maintenance expense in our Consolidated Statements
of Income.
A
LLOWANCES H ELD FOR R ESALE
Allowances held for resale are classified as materials and supplies
inventory in our Consolidated Balance Sheets and valued at
LOCOM.
These allowances are not consumed and therefore are not
subject to amortization. We report purchases and sales of these
allowances as operating activities in our Consolidated Statements
of Cash Flows. Sales of these allowances are reported in operating
revenue and the cost of allowances sold are reported in other
energy-related commodity purchases expense in our Consolidated
Statements of Income.
Goodwill and Intangible Assets
We evaluate goodwill for impairment annually, as of April 1, after
a portion of goodwill has been allocated to a business to be dis-
posed of and whenever an event occurs or circumstances change
in the interim that would more likely than not reduce the fair
value of a reporting unit below its carrying amount. Intangible
assets with finite lives are amortized over their estimated useful
lives or as consumed.
Impairment of Long-Lived and Intangible Assets
We perform an evaluation for impairment whenever events or
changes in circumstances indicate that the carrying amount of
long-lived assets or intangible assets with finite lives may not be
recoverable. A long-lived or intangible asset is written down to
fair value if the sum of its expected future undiscounted cash
flows is less than its carrying amount.
Regulatory Assets and Liabilities
For utility operations subject to federal or state cost-of-service rate
regulation, regulatory practices that assign costs to accounting
periods may differ from accounting methods generally applied by
nonregulated companies. When it is probable that regulators will
permit the recovery of current costs through future rates charged
to customers, we defer these costs as regulatory assets that other-
wise would be expensed by nonregulated companies. Likewise, we
recognize regulatory liabilities when it is probable that regulators
will require customer refunds through future rates or when rev-
enue is collected from customers for expenditures that have yet to
be incurred. Generally, regulatory assets are amortized into
expense and regulatory liabilities are amortized into income over
the period authorized by the regulator.
Asset Retirement Obligations
We recognize AROs at fair value as incurred or when sufficient
information becomes available to determine a reasonable estimate
of the fair value of future retirement activities to be performed.
These amounts are capitalized as costs of the related tangible
long-lived assets. Since relevant market information is not avail-
able, we estimate fair value using discounted cash flow analyses.
With the reapplication of SFAS No. 71 to the Virginia juris-
diction of our utility generation operations on April 4, 2007, we
now report accretion of the AROs associated with nuclear
decommissioning of our utility nuclear power stations due to the
passage of time as an adjustment to the related regulatory liability
consistent with our practice for our other cost-of-service rate regu-
lated operations. Previously, we reported such expense in other
operations and maintenance expense in our Consolidated State-
ments of Income. We report accretion of all other AROs in other
operations and maintenance expense in our Consolidated State-
ments of Income.
Amortization of Debt Issuance Costs
We defer and amortize debt issuance costs and debt premiums or
discounts over the expected lives of the respective debt issues,
considering maturity dates and, if applicable, redemption rights
held by others. As permitted by regulatory authorities, gains or
losses resulting from the refinancing of debt allocable to utility
operations subject to cost-based rate regulation have also been
deferred and are amortized over the lives of the new issues.
74 Dominion 2007 Annual Report