Dominion Power 2005 Annual Report Download - page 90

Notes to Consolidated Financial Statements, Continued
and our December 31, 2005 provision for credit losses, that it is
unlikely that a material adverse effect on our financial position,
results of operations or cash flows would occur as a result of
counterparty nonperformance.
As a diversified energy company, we transact with major compa-
nies in the energy industry and with commercial and residential
energy consumers. Except for gas and oil exploration and produc-
tion business activities, these transactions principally occur in the
Northeast, Mid-Atlantic and Midwest regions of the United States.
We do not believe that this geographic concentration contributes
significantly to our overall exposure to credit risk. In addition, as a
result of our large and diverse customer base, we are not exposed
to a significant concentration of credit risk for receivables arising
from electric and gas utility operations, including transmission ser-
vices and retail energy sales.
Our exposure to credit risk is concentrated primarily within our
sales of gas and oil production and energy marketing and risk man-
agement activities, including our hedging activities, as we transact
with a smaller, less diverse group of counterparties and transactions
may involve large notional volumes and potentially volatile commod-
ity prices. Energy marketing and risk management activities include
trading of energy-related commodities, marketing of merchant
generation output, structured transactions and the use of financial
contracts for enterprise-wide hedging purposes. At December 31,
2005, gross credit exposure related to these transactions totaled
$1.34 billion, reflecting the unrealized gains for contracts carried at
fair value plus any outstanding receivables (net of payables, where
netting agreements exist), prior to the application of collateral. After
the application of collateral, our credit exposure is reduced to
$1.20 billion. Of this amount, investment grade counterparties
represent 69% and no single counterparty exceeded 10%.
Note 26. Equity Method Investments and
Affiliated Transactions
At December 31, 2005 and 2004, our equity method investments
totaled $331 million and $387 million, respectively, and equity earn-
ings on these investments totaled $43 million in 2005, $34 million
in 2004 and $25 million in 2003. We received dividends from these
investments of $28 million, $37 million and $28 million in 2005,
2004 and 2003, respectively. Our equity method investments are
reported on our Consolidated Balance Sheets in other investments.
Equity earnings on these investments are reported on our Consoli-
dated Statements of Income in other income (loss).
International Investments
CNG International (CNGI) was engaged in energy-related activities
outside of the United States, primarily through equity investments
in Australia and Argentina. After completing the CNG acquisition,
we committed to a plan to dispose of the entire CNGI operation
consistent with our strategy to focus on our core businesses.
During 2003, we recognized impairment losses totaling
$84 million ($69 million after-tax) related primarily to investments
in a pipeline business located in Australia and a small generation
facility in Kauai, Hawaii that was sold in December 2003 for cash
proceeds of $42 million. In 2004, we received cash proceeds of
$52 million and recognized a benefit in other income of $27 million
related to the sale of a portion of the Australian pipeline business.
At December 31, 2005, our remaining CNGI investment is
accounted for at its fair value of $4 million. We continue to market
this investment for sale.
Note 27. Dominion Capital, Inc.
We have substantially exited the core DCI financial services,
commercial lending and residential mortgage lending businesses.
Our Consolidated Balance Sheets reflect the following
DCI assets:
At December 31, 2005 2004
(millions)
Current assets $108 $26
Available-for-sale securities 286 335
Other investments 89 102
Property, plant and equipment, net 10 15
Deferred charges and other assets 87 121
Total $580 $599
Securitizations of Financial Assets
At December 31, 2005 and 2004, DCI held $286 million and
$335 million, respectively, of retained interests from the securitiza-
tion of financial assets, which are classified as available-for-sale
securities. The retained interests resulted from prior year securitiza-
tions of commercial loans receivable in collateralized loan obliga-
tion (CLO), collateralized debt obligation (CDO) and collateralized
mortgage obligation (CMO) transactions.
In connection with ongoing efforts to divest our remaining finan-
cial services investments, we executed certain agreements in the
fourth quarter of 2003 that resulted in the sale of commercial
finance receivables, a note receivable, an undivided interest in a
lease and equity investments to a new CDO structure. In exchange
for the sale of these assets with an aggregate carrying amount of
$123 million, we received $113 million cash and a $7 million 3%
subordinated secured note in the new CDO structure and recorded
an impairment charge of $3 million. The equity interests in the new
CDO structure, a voting interest entity, are held by an entity that is
not affiliated with us.
Simultaneous with the above transaction, the new CDO struc-
ture acquired all of the loans held by two special purpose trusts that
were established in 2001 and 2000 to facilitate DCI’s securitization
of certain loan receivables. DCI’s original transfers of the loans to
the CLO trusts qualified as sales under SFAS No. 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. Only after receiving consents from non-affiliated third
parties, the CLO trusts’ governing agreements were amended to
permit the sale of their financial assets into the new CDO structure
in 2003. In consideration for the sale of loans to the new CDO
structure, the trusts received $243 million of subordinated secured
3% notes in the new CDO structure and $119 million in cash, which
was used by the CLO trusts to redeem all of their outstanding senior
debt securities. As of December 31, 2003, we still held residual
interests in the CLO trusts, the value of which depended solely on
the subordinated 3% notes issued by the new CDO. In connection
with a review of the remaining assets in the CLO trusts, DCI
recorded impairments totaling $23 million in 2003. We received
our distribution of the new CDO notes in the first quarter of
2004 upon liquidation of the trusts.
88 Dominion 2005