Dominion Power 2002 Annual Report Download - page 46

Management’s Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Debt Covenants
As part of borrowing funds and issuing debt (both short-term
and long-term) or preferred securities, the Dominion Compa-
nies must enter enabling agreements. These agreements contain
covenants that, in the event of default, could result in the accel-
eration of principal and interest payments; restrictions on distri-
butions related to its capital stock, including dividends,
redemptions, repurchases, liquidation payments or guarantee
payments; and in some cases, the termination of credit commit-
ments 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 provi-
sions 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 matters
related to merger or consolidation, restrictions on disposition of
substantial assets;
■financial covenants, such as a limit on total funded debt to
total capitalization;
■compliance with collateral minimums or requirements
related to mortgage bonds; 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, 2002, there were no events of default under
the Dominion Companies’ covenants.
Investing Activities
During 2002, investing activities resulted in a net cash outflow
of $4.0 billion, reflecting the following:
■$1.3 billion that included construction and expansion of
generation facilities, including environmental upgrades, pur-
chase of nuclear fuel, and construction and improvements of gas
and electric transmission and distribution assets;
■$1.5 billion for the purchase and development of gas and oil
producing properties, drilling and equipment costs and unde-
veloped lease acquisitions;
■the acquisitions of State Line for $185 million and Cove
Point for $225 million; and
■contributions to escrow of $500 million that were subse-
quently used to repay a portion of certain Dominion senior
notes maturing in January 2003.
Cash Requirements for Planned Capital Expenditures
Cash requirements for Dominion’s planned capital expenditures
during 2003, 2004 and 2005 are expected to total approxi-
mately $2.5 billion, $2.3 billion and $2.2 billion, respectively.
These expenditures include construction and expansion of
generation facilities, environmental upgrades, construction
improvements and expansion of gas and electric transmission
and distribution assets, purchases of nuclear fuel and expendi-
tures to develop natural gas and oil properties. Dominion
expects to fund its capital expenditures with cash from
operations, and a combination of sales of securities and
short-term borrowings.
Off-Balance Sheet Arrangements
Leasing Arrangements
As of December 31, 2002, Dominion, through certain sub-
sidiaries, has entered into agreements with special purpose enti-
ties (lessors) in order to finance and lease several new power
generation projects, as well as its corporate headquarters and
aircraft. As Dominion is considered the owner of the leased
property for tax purposes, it is entitled to tax deductions for
depreciation not recognized for financial accounting purposes.
In addition, because the leases are structured to be operating
leases for financial accounting purposes, the assets and related
borrowings used to finance the construction of the assets are not
included on Dominion’s Consolidated Balance Sheets. Although
this improves measures of leverage calculated using amounts
reported in Dominion’s Consolidated Financial Statements,
credit rating agencies view such amounts as debt obligations in
evaluating Dominion’s credit profile. These leasing structures
provide a desirable level of operational flexibility. Dominion
has been appointed to act as the construction agent for the
lessor and controls the design and construction of the facility.
Also, Dominion has the option to purchase the facility at the
expiration or termination of the lease and thus may benefit
from any appreciation in the value of the facility. While
Dominion is exposed to sharing in any loss that could occur if
the project were terminated prior to completion or sold after
being completed, such exposure is limited to a stated percentage
of the realized loss, as discussed below. In addition, under the
terms of each lease, the lessee generally retains operational
control of the facility.
At December 31, 2002, the lessors had an aggregate
financing commitment from equity and debt investors of
$2.2 billion. Of that amount, $1.6 billion had been used for
total project costs. Total project costs at December 31, 2002
included approximately $288 million of costs advanced by
Dominion to the lessor, that will be reimbursed by the lessor
during the second quarter of 2003. Dominion, in its role as
44 Dominion ’02 Annual Report