Dominion Power 2003 Annual Report Download - page 42

40.Dominion 2003
Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Other Corporate Operations
The net loss associated with other corporate operations for 2003
increased by $78 million as compared to 2002, primarily reflect-
ing the impairment of certain investments held for sale. Included
in these investments was a small generation facility in Kauai,
Hawaii that was sold in December 2003.
The net loss associated with other corporate operations
decreased in 2002 as compared to 2001, primarily as a result
of discontinuing the amortization of goodwill beginning
January 1, 2002.
Dominion’s Sources and Uses
of Cash
Dominion and its subsidiaries depend on both internal and
external sources of liquidity to provide working capital and to
fund capital requirements. Short-term cash requirements not
met by cash provided by operating activities are generally
satisfied with proceeds from short-term borrowings. Long-term
cash needs are met through sales of securities and additional
long-term financing.
At December 31, 2003, Dominion had cash and cash equiva-
lents of $126 million with $655 million of unused capacity under
its credit facilities. For long-term financing needs, amounts avail-
able for debt or equity offerings under currently effective shelf
registrations totaled $4.4 billion at March 1, 2004.
Cash Provided By Operations
As presented on Dominion’s Consolidated Statements of Cash
Flows, net cash flows from operating activities were $2.4 billion
for each of the years 2003, 2002 and 2001. Dominion’s manage-
ment believes that its operations provide a stable source of cash
flow sufficient to contribute to planned levels of capital expendi-
tures and maintain or grow current shareholder dividend levels.
Dominion’s operations are subject to risks and uncertainties
that may negatively impact the timing or amounts of operating
cash flow, including:
• Unusual weather and its effect on energy sales to customers
and energy commodity prices;
• Extreme weather events that could disrupt gas and oil produc-
tion or cause catastrophic damage to Dominion’s electric distribu-
tion and transmission systems;
• Exposure to unanticipated changes in prices for energy com-
modities purchased or sold, including the effect on derivative
instruments that may require the use of funds to post margin
deposits with counterparties;
• Effectiveness of Dominion’s risk management activities and
underlying assessment of market conditions and related factors,
including energy commodity prices, basis, liquidity, volatility,
counterparty credit risk, availability of generation and transmis-
sion capacity, currency exchange rates and interest rates;
• The cost of replacement electric energy in the event of longer-
than-expected or unscheduled generation outages;
• Contractual or regulatory restrictions on transfers of funds
among Dominion and its subsidiaries; and
• Timeliness of recovery for costs subject to cost-of-service utility
rate regulation.
Credit Risk
Dominion’s exposure to potential concentrations of credit risk
results primarily from its energy trading, marketing and hedging
activities and sales of gas and oil production. Presented below is
a summary of Dominion’s gross and net credit exposure as of
December 31, 2003 for these activities. Dominion calculates its
gross credit exposure for each counterparty as the unrealized fair
value of derivative contracts plus any outstanding receivables (net
of payables, where netting agreements exist), prior to the appli-
cation of collateral.
Gross Net
Credit Credit Credit
Exposure Collateral Exposure
(millions)
Investment grade(1) $404
—
$404
Non-investment grade(2) 60 $14 46
No external ratings:
Internally rated
—
investment grade(3) 306 — 306
Internally rated —
non-investment grade(4) 109 — 109
Total $879 $14 $865
(1) Designations as investment grade are based upon minimum credit ratings
assigned by Moody’s and Standard & Poor’s. The five largest counterparty
exposures, combined, for this category represented approximately 13% of
the total gross credit exposure.
(2)The five largest counterparty exposures, combined, for this category
represented approximately 4% of the total gross credit exposure.
(3)The five largest counterparty exposures, combined, for this category
represented approximately 24% of the total gross credit exposure.
(4)The five largest counterparty exposures, combined, for this category
represented approximately 5% of the total gross credit exposure.
Cash Provided By Financing Activities
Dominion Resources, Inc., Virginia Electric and Power Company
(Virginia Power) and CNG (collectively the Dominion Compa-
nies) rely on bank and capital markets as a significant source of
funding for capital requirements not satisfied by cash provided
by the companies’ operations. As discussed further in the
Credit Ratings section below, the Dominion Companies’ ability
to borrow funds or issue securities and the return demanded by
investors are affected by the issuing company’s credit ratings. In
addition, the raising of external capital is subject to certain regu-
latory approvals, including authorization by the SEC and, in the
case of Virginia Power, the Virginia State Corporation Commis-
sion (Virginia Commission).