Dominion Power 2002 Annual Report Download - page 70

Notes to Consolidated Financial Statements, Continued
12 Inventories
At December 31, 2002 and 2001, stored gas inventory used in
local gas distribution operations was valued at $52 million and
$84 million, respectively, under the last-in-first-out (LIFO)
method. Based on the average price of gas purchased during
2002, the current cost of replacing the current portion of stored
gas inventory exceeded the amount stated on a LIFO basis by
approximately $163 million. At December 31, 2002 and 2001,
the stored gas inventory of certain of Dominion’s nonregulated
gas operations was valued at $179 million and $98 million,
respectively, using primarily the weighted average cost method.
A portion of gas in underground storage used as a pressure
base and for operational balancing was included in property,
plant and equipment in the amount of $124 million at Decem-
ber 31, 2002 and 2001. Property, plant and equipment also
reflected a reduction for volumes temporarily withdrawn from
storage and valued at replacement costs of $53 million and
$25 million as of December 31, 2002 and 2001, respectively.
Materials and supplies and fossil fuel inventories are valued
using primarily the weighted average cost method.
13Securitization of Financial Assets
In prior years, Dominion sold residential mortgage loans
and commercial loans in securitization transactions. In those
securitizations, Dominion retained servicing responsibilities
and interests which are subordinate to the interests of investors
participating in the securitizations. The investors and the
securitization trusts have no recourse to Dominion’s other
assets for failure of debtors to pay when due. In 2001 and
2000, Dominion recognized pretax gains of $21 million and
$85 million, respectively, on the securitization of residential
mortgage loans.
Dominion’s retained interests in mortgage securitizations
were based on rights to annual servicing fees approximating
50 basis points of the outstanding balance and rights to future
cash flows from the performance of the loan portfolios after
the investors in the securitization trusts have received their con-
tracted return. In addition, Dominion will continue to receive
future cash flows from prepayment penalties on mortgage loans
that payoff during the contractual penalty period. The value of
the retained interests is subject to credit, prepayment and inter-
est rate risks related to the mortgage loans sold. For CLOs,
Dominion receives annual servicing fees of 38 basis points of
the outstanding balance and rights to future cash flows after the
investors in the securitization trusts have received their con-
tracted return. The estimated fair value of Dominion’s retained
interests at the time of the 2001 and 2000 securitizations was
based on expected cash flow recoveries from the loan portfolios.
The majority of the commercial loans securitized were variable
rate loans. As a result, changes in interest rates will not cause
a material change in the performance of the loan portfolios.
See Notes 2 and 9 for a discussion of Dominion’s accounting
policy for securitizations and the outcome of routine quarterly
reviews of retained interests in mortgage, CLO and CDO
securitizations during 2002, 2001 and 2000 and related
impairment charges.
Activity for the retained interests from securitizations of
mortgage loans, including interest-only strips and servicing
rights, and the CLO and CDO retained interests is summarized
as follows:
Interest-Only Servicing
Strips— Rights Retained Retained
Mortgage Mortgage Interest— Interest—
Loans(1) Loans CLO CDO
(millions)
Balance at January 1, 2000 $ 347 $ 39 — $58
Retained from securitization 99 18 $ 76 30
Amortization (16) (7) ——
Cash received (51) —— (4)
Gain on trading securities 25 ———
Fair value adjustment (102) (5) — (1)
Balance at December 31, 2000 302 45 76 83
Retained from securitization 33 — 196 —
Amortization (9) ———
Cash received (55) —— (6)
Gain on trading securities 19 ———
Servicing rights sold(2) (45) ——
Fair value adjustment (21) — (67) (14)
Balance at December 31, 2001 269 — 205 63
Amortization (5) ———
Cash received (49) —— (2)
Loss on securities (19) ———
Fair value adjustment (11) ———
Balance at December 31, 2002 $ 185 — $205 $ 61
(1) Includes prepayment penalties.
(2) Dominion sold all of its servicing rights as part of its sale of Saxon
Mortgage in 2001.
68 Dominion ’02 Annual Report