SEC Company Response from VIRGINIA ELECTRIC & POWER CO (CIK 0000103682) — Oct 27, 2005
VIRGINIA ELECTRIC & POWER CO (CIK 0000103682)
Date: Oct. 27, 2005 · CIK: 0000103682 · Accession: 0000715957-05-000051
AI Filing Summary & Sentiment
Referenced dates: September 28, 2005
Letter
Division of Corporation Finance Filed February 28, 2005 Form 10-Q, for the three months ended June 30, 2005 Filed August 3, 2005 File No. 1-2255
Dear Mr. Allegretto:
Consolidated Natural Gas Company (CNG) and Virginia Electric and Power Company (Virginia Power) received the Staff's letter dated September 28, 2005, which provided comments on the above-referenced documents. Both CNG and Virginia Power are wholly-owned subsidiaries of Dominion Resources, Inc. (Dominion). This response letter has been filed on EDGAR, and a copy has been sent by express mail.
As requested by the Staff, CNG and Virginia Power hereby acknowledge the following:
CNG and Virginia Power are responsible for the adequacy and accuracy of the disclosures in their filings with the SEC;
Staff comments or changes to disclosure in response to Staff comments do not foreclose the Commission from taking action with respect to the filings; and
CNG and Virginia Power may not assert Staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
For your convenience, the Staff's comments are set forth below and are followed by our responses.
Consolidated Natural Gas Company Form 10-K for the year ended December 31, 2004
Item 2. Properties, page 6
1. Explain to us, or show us where it is discussed, the reasons why proved developed oil reserves have materially increased in 2004, as compared with 2003.
Response
Proved developed oil reserves increased in 2004 as compared to 2003, primarily due to the development and attendant reclassification of reserves associated with CNG's deepwater Mississippi Canyon 773 field. During 2004, tie back and hookup operations were completed and CNG's Mississippi Canyon 773 wells began producing through the Devils Tower production facilities. As a result, applicable Mississippi Canyon 773 reserves were reclassified from "Proved Undeveloped" to "Proved Developed" reserves.
Item 7. Management's Discussion and Analysis of Results of Operations, page 9
Energy, page 10
2. You disclose that variability in expenses for your non-regulated businesses relates, in part, to payments under financially-settled contracts. Explain to us in detail how financially-settled contracts result in variability in expenses and whether such expenses are offset by some other item. Quantify the variability for the past three years supplementally and prospectively. Please also explain to us how you are accounting for such contracts. If such contracts are designated hedges, explain the type and structure. A detailed example(s) of such transaction(s) which shows the mechanics of the contract and the journal entries used to record such contracts would facilitate our review.
Response
In drafting the description of the Energy segment's nonregulated operations addressed in this comment, CNG had attempted to describe all possible contributors to the variability of expenses. CNG intended the description to be relevant not only for the periods covered by the report, but also for future periods consistent with efforts to incorporate a forward-looking perspective. The reference to "payments under financially-settled contracts" was intended to provide for the possibility that the Energy segment could hold derivatives that are subject to financial settlement and are not designated as hedges.
The Energy segment reported net gains (losses) on derivatives subject to financial settlement and not designated as hedges, of $1 million, $(4) million and $(4) million for the years 2004, 2003 and 2002. Based on the Staff's comment, CNG now recognizes that inclusion of all possible contributors in this disclosure, without considering each factor's significance in the periods covered by the report, may cause confusion. In future filings, CNG will clarify this disclosure to assist the reader's understanding and to ensure compatibility with the actual results of operations reported for the periods covered by the report.
Operating Revenue, page 14
3. Help us understand the business reasons for the transactions which led to a $109 million increase in other revenue from sales of purchased oil by exploration and production operations. In this regard, you disclose that this increase was largely offset by corresponding increases in Liquids, pipeline capacity and other purchases expenses. Please provide us the accounting analysis used for gross reporting of these transactions and explain to us the physical flow of the product including whether it was inventoried or part of the buy/sell arrangements.
Response
The $109 million increase in revenue from sales of purchased oil was primarily due to increased buy/sell activity related to CNG's offshore oil production, including significant additional activity related to CNG's deepwater oil producing wells that commenced production in 2004. The increase in
revenue from sales of purchased oil was offset by a $108 million increase in buy/sell related purchase activity.
As discussed in Note 2 to the Consolidated Financial Statements under the heading Crude Oil Buy/Sell Arrangements, CNG enters into buy/sell agreements as a means to reposition its offshore Gulf of Mexico crude oil production to more liquid marketing locations onshore. CNG typically enters into either a single or a series of buy/sell transactions in which it sells its crude oil production at the offshore field delivery point and buys similar quantities at Cushing, Oklahoma for sale to third parties. CNG is able to enhance profitability by selling to a wide array of refiners and/or trading companies at Cushing, rather than restricting its sales to a limited number of refinery purchasers in locations proximate to its Gulf of Mexico field delivery points.
Under the primary guidance of Emerging Issue Task Force (EITF) Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, CNG presents the sales and purchases related to its crude oil buy/sell arrangements on a gross basis in its Consolidated Statements of Income. These transactions require physical delivery of the crude oil and the risks and rewards of ownership are evidenced by title transfer, assumption of environmental risk, transportation scheduling and counterparty non-performance risk. CNG is currently assessing the impact that the recently ratified EITF Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty, may have on its income statement presentation of these transactions.
Other Operations and Maintenance Expenses, page 15
4. Tell us your rationale for classification of the $96 million charge related to the discontinuance of hedge accounting to operations and maintenance expense. Please specifically tell us why it was classified in the corporate segment as opposed to the segment in which it originated when it was an effective hedge. We note your disclosure in significant accounting policies that specific line item classification is determined based on the nature of the risk underlying individual hedge strategies. Explain to us what this means including where you classify the effective portions of the accounting hedges. An example may be helpful to our understanding of your classification policy.
Response
As disclosed in Note 2 to the Consolidated Financial Statements under the heading Derivative Instruments Held for Other Purposes, under CNG's income statement classification policy, unrealized changes in fair value and settlements for financially-settled derivatives that are not designated as hedging instruments are classified within Other operations and maintenance expense. In light of the disruption caused by Hurricane Ivan, it became probable that the forecasted sales being hedged would not occur, therefore these financially settled instruments were de-designated as hedges. The reclassification of the losses on those instruments reported in Accumulated other comprehensive income (loss) (AOCI) prior to the de-designation, as well as subsequent changes in unrealized fair value and settlements, were classified in Other operations and maintenance expense, based on CNG's policy for reporting gains/losses on derivative instruments that are subject to financial settlement and are not designated as hedging instruments.
Note 23 to the Consolidated Financial Statements describes the components of the Corporate and Other operating segment. That disclosure indicates that certain items are not allocated to the Energy, Delivery or Exploration & Production operating segments in the measure of profit and loss reported to the chief operating decision-makers (CODM). CNG evaluates the performance of its operating segments by consistently excluding such items. Under CNG's management reporting, segment managers are neither held accountable for, nor receive the benefit from, items that are not considered by the CODM to be representative of ongoing segment operations. These items generally include unusual or nonrecurring items, extraordinary items, cumulative effect of changes in accounting principle and expenses resulting from decisions made by senior management in the context of the enterprise as a whole rather than at the segment level. Under this approach, a charge related to the discontinuance of hedge accounting as a result of damage to certain offshore oil production facilities in
the Gulf of Mexico caused by Hurricane Ivan, and the related loss of forecasted oil production, is an example of an item that management believes should be excluded from its operating segments' results.
CNG disclosed the specific items excluded from its primary operating segments' results of operations in Note 23 to the Consolidated Financial Statements, as well as in the Corporate and Other Results of Operations section of Management's Discussion and Analysis of Results of Operations (MD&A).
Specific line item classification for fair value changes of derivative instruments included in a hedge strategy is determined based on the nature of the risk underlying the hedge strategy. For cash flow hedges, the effective portion of gains or losses are classified within AOCI until the forecasted transaction occurs or when it becomes probable that the forecasted transaction will not occur, at which time the hedging gains or losses are reclassified and included in earnings. The risk being hedged refers to whether CNG is hedging the risk of cash flow variability for commodity sales, commodity purchases, or interest payments, or the risk of changes in fair value of inventory or debt. In each case, gains or losses on the hedging instrument would be recorded in the income statement line item in which the hedged item is recognized. For example, if CNG is using a financially- settled instrument to hedge the risk of cash flow variability of future sales of CNG's oil production, the effective portion of the financially-settled instrument would initially be classified in AOCI and then would be reclassified to the Gas and oil production revenue line item with the corresponding oil sales once the forecasted sale has occurred.
Exploration and Production Segment, page 16
5. You disclose average realized prices with and without hedging results for your gas and oil revenue although it is not clear to a reader what percentage of your production was actually hedged. We assume you sell forward a significant portion of your anticipated production. Prospectively, enhance your exploration and production segment disclosure to quantify the extent of your hedging activities including the extent to which you are "locked-in" to fixed prices and the duration.
Response
In future filings, CNG's disclosure will include quantification of the extent of our hedging activities, including the extent to which our production is "locked-in" to fixed prices and the duration.
Consolidated Statements of Income, page 23
6. Tell us what you have netted against interest expense.
Response
In order of significance, the following items are netted against interest expense: capitalized interest, gains/losses from debt-related accounting hedges (e.g., those involving interest rate swaps), amortization of debt premiums, and allowance for funds used during construction.
Consolidated Statements of Cash Flows, page 27
7. Explain to us what comprises other operating assets and liabilities cash outflow of $(220) million for the year ended December 31, 2004.
Response
The $(220) million change in other operating assets and liabilities primarily consists of $(165) million related to the change in derivative assets and liabilities (net of the related change in AOCI) and $(26) million related to changes in regulatory assets.
8. Explain to us what comprises other plant investing cash outflows of $(378) million for the year ended December 31, 2004.
Response
The $(378) million cash outflow represents capital expenditures for the construction and improvement of gas transmission and distribution assets.
Note 2. Significant Accounting Policies - Property, Plant and Equipment, page 31
9. Composite rates of depreciation are generally acceptable for rate regulated PP&E. Accordingly, please make it clear in future filings which property is regulated. For PP&E not subject to rate recovery, we believe the composition of plant assets along with the range of lives is required by paragraph 14 of APBO no. 22 and prevailing practice. Please revise or advise.
Response
CNG disclosed the composition of plant assets individually for utility and non-utility property in Note 10 to the Consolidated Financial Statements. CNG will revise its disclosure in future filings to exclude non-utility property from its reported depreciation rates and will instead provide the range of lives for those assets.
Note 7. International Investments, page 33
10. Please tell us why the impairment losses were not included in income from operations pursuant to paragraph 25 or 45 of SFAS no. 144. Additionally, tell us why the impairment loss on the Australian pipeline business for 2003 of $62 million on page 15 does not equal the impairment loss classified in corporate and other on page 17. Furthermore, explain to us if you applied the equity method of accounting to your investment in the Australian pipeline business, and if so, the nature of the $18 million benefit you recognized related to this investment. If you did not apply the equity method, tell us what you meant by your statement, "CNG International Corporation (CNGI) was engaged in energy-related activities outside of the continental United States, primarily through equity investments in Australia and Argentina." We may have further comment.
Response
In 2000, management committed to a plan to dispose of the entire CNGI operation consistent with its strategy to focus on its core business. As of that date the CNGI assets, which included the equity investment in the Australian pipeline business that was accounted for using the equity method, were classified as held-for-sale in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, was effective for financial statements issued for fiscal years beginning after December 15, 2001. Paragraph 51 of SFAS No. 144 indicated, however, that assets classified as held-for-disposal as a result of activities initiated prior to SFAS N
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CORRESP 1 filename1.htm cngvpcomltr October 27, 2005 Mr. Jim Allegretto Senior Assistant Chief Accountant Division of Corporation Finance U.S. Securities and Exchange Commission 100 F Street, NE Washington, DC 20549 RE: Consolidated Natural Gas Company Form 10-K, for the year ended December 31, 2004 Filed February 28, 2005 Form 10-Q, for the three months ended June 30, 2005 Filed August 3, 2005 File No. 1-3196 Virginia Electric and Power Company Form 10-K, for the year ended December 31, 2004 Filed February 28, 2005 Form 10-Q, for the three months ended June 30, 2005 Filed August 3, 2005 File No. 1-2255 Dear Mr. Allegretto: Consolidated Natural Gas Company (CNG) and Virginia Electric and Power Company (Virginia Power) received the Staff's letter dated September 28, 2005, which provided comments on the above-referenced documents. Both CNG and Virginia Power are wholly-owned subsidiaries of Dominion Resources, Inc. (Dominion). This response letter has been filed on EDGAR, and a copy has been sent by express mail. As requested by the Staff, CNG and Virginia Power hereby acknowledge the following: CNG and Virginia Power are responsible for the adequacy and accuracy of the disclosures in their filings with the SEC; Staff comments or changes to disclosure in response to Staff comments do not foreclose the Commission from taking action with respect to the filings; and CNG and Virginia Power may not assert Staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. For your convenience, the Staff's comments are set forth below and are followed by our responses. Consolidated Natural Gas Company Form 10-K for the year ended December 31, 2004 Item 2. Properties, page 6 1. Explain to us, or show us where it is discussed, the reasons why proved developed oil reserves have materially increased in 2004, as compared with 2003. Response Proved developed oil reserves increased in 2004 as compared to 2003, primarily due to the development and attendant reclassification of reserves associated with CNG's deepwater Mississippi Canyon 773 field. During 2004, tie back and hookup operations were completed and CNG's Mississippi Canyon 773 wells began producing through the Devils Tower production facilities. As a result, applicable Mississippi Canyon 773 reserves were reclassified from "Proved Undeveloped" to "Proved Developed" reserves. Item 7. Management's Discussion and Analysis of Results of Operations, page 9 Energy, page 10 2. You disclose that variability in expenses for your non-regulated businesses relates, in part, to payments under financially-settled contracts. Explain to us in detail how financially-settled contracts result in variability in expenses and whether such expenses are offset by some other item. Quantify the variability for the past three years supplementally and prospectively. Please also explain to us how you are accounting for such contracts. If such contracts are designated hedges, explain the type and structure. A detailed example(s) of such transaction(s) which shows the mechanics of the contract and the journal entries used to record such contracts would facilitate our review. Response In drafting the description of the Energy segment's nonregulated operations addressed in this comment, CNG had attempted to describe all possible contributors to the variability of expenses. CNG intended the description to be relevant not only for the periods covered by the report, but also for future periods consistent with efforts to incorporate a forward-looking perspective. The reference to "payments under financially-settled contracts" was intended to provide for the possibility that the Energy segment could hold derivatives that are subject to financial settlement and are not designated as hedges. The Energy segment reported net gains (losses) on derivatives subject to financial settlement and not designated as hedges, of $1 million, $(4) million and $(4) million for the years 2004, 2003 and 2002. Based on the Staff's comment, CNG now recognizes that inclusion of all possible contributors in this disclosure, without considering each factor's significance in the periods covered by the report, may cause confusion. In future filings, CNG will clarify this disclosure to assist the reader's understanding and to ensure compatibility with the actual results of operations reported for the periods covered by the report. Operating Revenue, page 14 3. Help us understand the business reasons for the transactions which led to a $109 million increase in other revenue from sales of purchased oil by exploration and production operations. In this regard, you disclose that this increase was largely offset by corresponding increases in Liquids, pipeline capacity and other purchases expenses. Please provide us the accounting analysis used for gross reporting of these transactions and explain to us the physical flow of the product including whether it was inventoried or part of the buy/sell arrangements. Response The $109 million increase in revenue from sales of purchased oil was primarily due to increased buy/sell activity related to CNG's offshore oil production, including significant additional activity related to CNG's deepwater oil producing wells that commenced production in 2004. The increase in 2 revenue from sales of purchased oil was offset by a $108 million increase in buy/sell related purchase activity. As discussed in Note 2 to the Consolidated Financial Statements under the heading Crude Oil Buy/Sell Arrangements, CNG enters into buy/sell agreements as a means to reposition its offshore Gulf of Mexico crude oil production to more liquid marketing locations onshore. CNG typically enters into either a single or a series of buy/sell transactions in which it sells its crude oil production at the offshore field delivery point and buys similar quantities at Cushing, Oklahoma for sale to third parties. CNG is able to enhance profitability by selling to a wide array of refiners and/or trading companies at Cushing, rather than restricting its sales to a limited number of refinery purchasers in locations proximate to its Gulf of Mexico field delivery points. Under the primary guidance of Emerging Issue Task Force (EITF) Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, CNG presents the sales and purchases related to its crude oil buy/sell arrangements on a gross basis in its Consolidated Statements of Income. These transactions require physical delivery of the crude oil and the risks and rewards of ownership are evidenced by title transfer, assumption of environmental risk, transportation scheduling and counterparty non-performance risk. CNG is currently assessing the impact that the recently ratified EITF Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty, may have on its income statement presentation of these transactions. Other Operations and Maintenance Expenses, page 15 4. Tell us your rationale for classification of the $96 million charge related to the discontinuance of hedge accounting to operations and maintenance expense. Please specifically tell us why it was classified in the corporate segment as opposed to the segment in which it originated when it was an effective hedge. We note your disclosure in significant accounting policies that specific line item classification is determined based on the nature of the risk underlying individual hedge strategies. Explain to us what this means including where you classify the effective portions of the accounting hedges. An example may be helpful to our understanding of your classification policy. Response As disclosed in Note 2 to the Consolidated Financial Statements under the heading Derivative Instruments Held for Other Purposes, under CNG's income statement classification policy, unrealized changes in fair value and settlements for financially-settled derivatives that are not designated as hedging instruments are classified within Other operations and maintenance expense. In light of the disruption caused by Hurricane Ivan, it became probable that the forecasted sales being hedged would not occur, therefore these financially settled instruments were de-designated as hedges. The reclassification of the losses on those instruments reported in Accumulated other comprehensive income (loss) (AOCI) prior to the de-designation, as well as subsequent changes in unrealized fair value and settlements, were classified in Other operations and maintenance expense, based on CNG's policy for reporting gains/losses on derivative instruments that are subject to financial settlement and are not designated as hedging instruments. Note 23 to the Consolidated Financial Statements describes the components of the Corporate and Other operating segment. That disclosure indicates that certain items are not allocated to the Energy, Delivery or Exploration & Production operating segments in the measure of profit and loss reported to the chief operating decision-makers (CODM). CNG evaluates the performance of its operating segments by consistently excluding such items. Under CNG's management reporting, segment managers are neither held accountable for, nor receive the benefit from, items that are not considered by the CODM to be representative of ongoing segment operations. These items generally include unusual or nonrecurring items, extraordinary items, cumulative effect of changes in accounting principle and expenses resulting from decisions made by senior management in the context of the enterprise as a whole rather than at the segment level. Under this approach, a charge related to the discontinuance of hedge accounting as a result of damage to certain offshore oil production facilities in 3 the Gulf of Mexico caused by Hurricane Ivan, and the related loss of forecasted oil production, is an example of an item that management believes should be excluded from its operating segments' results. CNG disclosed the specific items excluded from its primary operating segments' results of operations in Note 23 to the Consolidated Financial Statements, as well as in the Corporate and Other Results of Operations section of Management's Discussion and Analysis of Results of Operations (MD&A). Specific line item classification for fair value changes of derivative instruments included in a hedge strategy is determined based on the nature of the risk underlying the hedge strategy. For cash flow hedges, the effective portion of gains or losses are classified within AOCI until the forecasted transaction occurs or when it becomes probable that the forecasted transaction will not occur, at which time the hedging gains or losses are reclassified and included in earnings. The risk being hedged refers to whether CNG is hedging the risk of cash flow variability for commodity sales, commodity purchases, or interest payments, or the risk of changes in fair value of inventory or debt. In each case, gains or losses on the hedging instrument would be recorded in the income statement line item in which the hedged item is recognized. For example, if CNG is using a financially- settled instrument to hedge the risk of cash flow variability of future sales of CNG's oil production, the effective portion of the financially-settled instrument would initially be classified in AOCI and then would be reclassified to the Gas and oil production revenue line item with the corresponding oil sales once the forecasted sale has occurred. Exploration and Production Segment, page 16 5. You disclose average realized prices with and without hedging results for your gas and oil revenue although it is not clear to a reader what percentage of your production was actually hedged. We assume you sell forward a significant portion of your anticipated production. Prospectively, enhance your exploration and production segment disclosure to quantify the extent of your hedging activities including the extent to which you are "locked-in" to fixed prices and the duration. Response In future filings, CNG's disclosure will include quantification of the extent of our hedging activities, including the extent to which our production is "locked-in" to fixed prices and the duration. Consolidated Statements of Income, page 23 6. Tell us what you have netted against interest expense. Response In order of significance, the following items are netted against interest expense: capitalized interest, gains/losses from debt-related accounting hedges (e.g., those involving interest rate swaps), amortization of debt premiums, and allowance for funds used during construction. Consolidated Statements of Cash Flows, page 27 7. Explain to us what comprises other operating assets and liabilities cash outflow of $(220) million for the year ended December 31, 2004. Response The $(220) million change in other operating assets and liabilities primarily consists of $(165) million related to the change in derivative assets and liabilities (net of the related change in AOCI) and $(26) million related to changes in regulatory assets. 4 8. Explain to us what comprises other plant investing cash outflows of $(378) million for the year ended December 31, 2004. Response The $(378) million cash outflow represents capital expenditures for the construction and improvement of gas transmission and distribution assets. Note 2. Significant Accounting Policies - Property, Plant and Equipment, page 31 9. Composite rates of depreciation are generally acceptable for rate regulated PP&E. Accordingly, please make it clear in future filings which property is regulated. For PP&E not subject to rate recovery, we believe the composition of plant assets along with the range of lives is required by paragraph 14 of APBO no. 22 and prevailing practice. Please revise or advise. Response CNG disclosed the composition of plant assets individually for utility and non-utility property in Note 10 to the Consolidated Financial Statements. CNG will revise its disclosure in future filings to exclude non-utility property from its reported depreciation rates and will instead provide the range of lives for those assets. Note 7. International Investments, page 33 10. Please tell us why the impairment losses were not included in income from operations pursuant to paragraph 25 or 45 of SFAS no. 144. Additionally, tell us why the impairment loss on the Australian pipeline business for 2003 of $62 million on page 15 does not equal the impairment loss classified in corporate and other on page 17. Furthermore, explain to us if you applied the equity method of accounting to your investment in the Australian pipeline business, and if so, the nature of the $18 million benefit you recognized related to this investment. If you did not apply the equity method, tell us what you meant by your statement, "CNG International Corporation (CNGI) was engaged in energy-related activities outside of the continental United States, primarily through equity investments in Australia and Argentina." We may have further comment. Response In 2000, management committed to a plan to dispose of the entire CNGI operation consistent with its strategy to focus on its core business. As of that date the CNGI assets, which included the equity investment in the Australian pipeline business that was accounted for using the equity method, were classified as held-for-sale in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, was effective for financial statements issued for fiscal years beginning after December 15, 2001. Paragraph 51 of SFAS No. 144 indicated, however, that assets classified as held-for-disposal as a result of activities initiated prior to SFAS N