Dominion Power 2007 Annual Report Download - page 108

Notes to Consolidated Financial Statements, Continued
3) a loan that in the reasonable business judgment of the
CDO entity’s collateral manager, is a Defaulted Security.
‰In general, a PIK Security is a loan with respect to which the
obligor has the right to defer or capitalize all or a portion of
the interest due on such loan as principal, unless such asset is
required on each payment date to pay in cash a spread of at
least the LIBOR plus 2.50%.
The CDO entity’s loan balances are summarized as follows:
As of December 31, 2007 2006
Performing
Non-
performing Total Performing
Non-
performing Total
(millions)
Loans(1) $538 $11 $549 $521 $21 $542
Unamortized
premiums,
discounts and
other cost basis
adjustments,
net (131) (3) (134) (127) (5) (132)
LOCOM
adjustments(2) (54) (8) (62) ———
Allowance for
loan losses ——— (2) (5) (7)
Loans, net $353 $— $353 $392 $11 $403
(1) Current portion: Performing—$30 million and $28 million in 2007
and 2006, respectively; Non-performing—$8 million in 2006.
(2) Includes $1 million and $7 million of allowances for loan losses recorded
during 2007 prior to the reclassification of loans receivable to loans held
for resale for performing and non-performing, respectively.
The notional value of the non-performing portfolio at
December 31, 2007 and 2006, was $149 million and $148 mil-
lion, respectively. During 2006, the CDO entity recorded provi-
sions for loan losses of $7 million and recorded direct write-offs,
net of recoveries amounting to $20 million. The interest income
earned from cash collections on non-performing loans in 2007
and 2006, was $5 million and $1 million, respectively.
A
LLOWANCE FOR L OAN L OSSES
The allowance for loan losses is a significant estimate that repre-
sents the CDO entity’s estimate of probable losses inherent in the
loan portfolio and equity investments as determined by the CDO
entity’s collateral manager.
In calculating the allowance for loan losses, the CDO entity’s
collateral manager applies a systematic and consistent approach
that considers among other factors: historical payment experience,
past-due status, current financial information, ability of the debt-
ors to generate cash flows and realizable value of collateral on a
loan by loan basis. Each material non-performing loan and
material equity investment is reviewed on a quarterly basis. A
range of probable losses is estimated for each loan after which a
probable loss is determined.
A loan is written off when it is considered fully uncollectible
and of such little value that its continuance as an asset is not
warranted. A loan or equity investment is also written off if the
borrower has ceased operations, the majority of the borrower’s
assets have been liquidated or sold, or the remaining collections
of the loans are speculative and expected to be minimal or highly
contingent.
L
OAN O RIGINATION F EES AND C OSTS
Loan origination fees and costs are deferred and recorded as part
of loans held for resale and then amortized over the life of the
loan as an adjustment to the yield in interest income.
D
EFERRED F INANCING C LOSING
Costs incurred to refinance debt are deferred and amortized over
the life of the notes. All costs associated with any notes that are
paid in full are expensed at the date of the payoff.
Key Economic Assumptions and Sensitivity Analyses
The loans held for resale held by the CDO entity are subject to
credit loss and interest rate risk. Adverse changes of up to 10% in
credit losses and interest rates are estimated in each case to have
less than a $40 million pre-tax impact on future results of oper-
ations.
Impairment Losses
The table below presents a summary of asset impairment losses
associated with DCI operations.
Year Ended December 31, 2007 2006 2005
(millions)
Retained interests from CMO securitizations(1) $27 $— $25
Loans held for resale(2) 54 ——
Retained interests from CDO securitizations(1) —85 —
Venture capital and other equity investments(3) 17 610
Total $98 $91 $35
(1) Reflects the result of economic conditions and historically low interest
rates and the resulting impact on credit losses and prepayment speeds. We
recorded impairments of our retained interests from CMO securitizations
in 2007 and 2005 and retained interests from CDO securitizations in
2006. We updated our credit loss and prepayment assumptions to reflect
our recent experience.
(2) During 2007, we recorded LOCOM adjustments of $54 million on our
loans held for resale.
(3) Impairments were recorded primarily due to our decision to dispose of
the assets when it became probable we would not recover the assets
recorded basis.
N OTE 29. O PERATING S EGMENTS
We are organized primarily on the basis of products and services
sold in the U.S. During the fourth quarter of 2007, we realigned
our business units to reflect our strategic refocusing and began
managing our daily operations through four operating segments.
All segment information for prior years has been recast to con-
form to the new segment structure. A description of our segments
follows:
DVP includes our regulated electric distribution and electric
transmission operations in Virginia and North Carolina, as well as
nonregulated retail energy marketing and all customer service
operations.
Dominion Energy includes our Ohio regulated natural gas dis-
tribution company, regulated gas transmission pipeline and stor-
age operations, including gathering and extraction activities,
regulated LNG operations and our Appalachian natural gas E&P
business. Dominion Energy also includes producer services, which
aggregates gas supply, provides market-based services related to
gas transportation and storage and engages in associated gas trad-
ing and marketing.
106 Dominion 2007 Annual Report