Dominion Power 2001 Annual Report Download - page 42

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
External Sources of Liquidity
Dominion Resources, Inc., Virginia Electric and Power Com-
pany and CNG (the Dominion Companies) rely on access to
bank and capital markets as a significant source of liquidity for
capital requirements not satisfied by cash provided by the com-
panies’ operations. 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 regulatory
approvals, including the SEC and, in the case of Virginia Elec-
tric and Power Company (Virginia Power), the Virginia State
Corporation Commission (Virginia Commission). Credit ratings
are intended to provide banks and capital market participants
with a framework for comparing the credit quality of securities.
Management believes that the current credit ratings of the
Dominion Companies provide sufficient access to the capital
markets. However, disruptions in the bank and capital markets
not specifically related to Dominion may affect the Dominion
Companies’ ability to access these funding sources or cause an
increase in the return required by investors.
Both quantitative (financial strength) and qualitative (busi-
ness or operating characteristics) factors are considered by the
credit rating agencies in establishing an individual company’s
credit rating. The credit ratings for the Dominion Companies
are most affected by each company’s financial profile, mix of reg-
ulated and nonregulated businesses and respective cash flows,
changes in methodologies used by the rating agencies and
“event risk,” if applicable, such as major acquisitions. Credit rat-
ings for the Dominion Companies as of March 1, 2002 follow:
Standard & Poor’s Moody’s
Dominion Resources, Inc.
Senior unsecured debt securities BBB+ Baa1
Preferred securities of subsidiary trusts BBB- Baa2
Commercial paper A-2 P-2
Virginia Power
Mortgage bonds A A2
Senior unsecured debt securities (including tax-exempt) A- A3
Preferred securities of subsidiary trust BBB+ Baa1
Preferred stock BBB+ Baa2
Commercial paper A-1 P-1
CNG
Senior unsecured debt securities BBB+ A3
Preferred securities of subsidiary trust BBB- Baa1
Commercial paper A-2 P-2
A downgrade in an individual company’s credit rating would not
generally restrict its ability to raise short-term and long-term
financing so long as its credit rating is still “investment grade,”
but it would increase the cost of borrowing. Dominion’s man-
agement proactively manages the financial structure of its con-
solidated businesses, including its business mix and acquisition
investments in an effort to maintain the Dominion Companies’
current credit ratings.
As part of borrowing funds and issuing debt (both short-
term and long-term) or preferred securities, the Dominion
Companies must enter enabling agreements. These agreements
contain covenants that, in the event of default, could trigger the
acceleration of principal and interest payments and, in some
cases, the termination of credit commitments unless a waiver of
such requirements is agreed to by the lenders/security holders.
These provisions are customary, with each agreement specifying
which covenants apply. These provisions are not necessarily
unique to the Dominion Companies. Some of the typical
covenants include:
•the timely payment of principal and interest;
•information requirements, including submittal of financial
reports filed with the SEC to lenders;
•keeping books and records in accordance with generally
accepted accounting principles;
•payment of taxes, maintaining insurance;
•performance obligations, audits/inspections, continuation
of the basic nature of business, restrictions on certain mat-
ters related to merger or consolidation, restrictions on
disposition of substantial assets;
•financial covenants, such as a limit on total funded debt to
total capitalization; and
•limitations on liens.
Dominion monitors the covenants on a regular basis in
order to provide assurance that events of default will not occur.
As of December 31, 2001, there were no events of default under
the Dominion Companies’ covenants.
During 2001, the Dominion Companies issued long-term
debt, preferred securities through affiliated subsidiary trusts, and
common stock totaling $8.4 billion. As discussed below, pro-
ceeds were used primarily to repay short-term debt, finance
major acquisitions and capital expenditures, and support finan-
cial services operations.
2001 — Financings Associated with Major Acquisitions
In 2001, Dominion Resources, Inc., refinanced the remaining
bridge financing associated with the CNG acquisition with the
following issuances of securities: $300 million of 8.4 percent trust
preferred securities due 2041, issued through an affiliated trust,
and $1 billion of 2-year fixed rate 6 percent senior notes.
Also in 2001, Dominion Resources, Inc., through another
affiliated trust, issued $250 million ($247 million after discount)
of 8.4 percent capital securities due 2031, in connection with
the acquisition of Millstone. The balance of the acquisition was
funded by proceeds of common stock issued in 2000 and cash
temporarily available from other internal sources. Dominion
40