Dominion Power 2002 Annual Report Download - page 71

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Presented below are the fair values of Dominion’s retained
interests and related key economic assumptions as of December
31, 2002 and the sensitivity of the retained interests’ fair value
to adverse changes of 10 percent and 20 percent in those
assumptions:
Retained
Interest— Retained Retained
Mortgage Interest— Interest—
Loans CLO CDO
(millions, except percentages)
Carrying amount/fair value $182 $205 $ 61
Weighted-average life (in years) 3.54 1.87 3.69
Prepayment speed assumption
(annual rate) (1) N/A N/A
Impact on fair value of 10%
adverse change $ (12) N/A N/A
Impact on fair value of 20%
adverse change (23) N/A N/A
Expected credit losses (annual rate) 3.6% 4%(2) 2%(3)
Impact on fair value of 10%
adverse change $ (7) $ (6) $ (3)
Impact on fair value of 20%
adverse change (14) (10) (7)
Residual cash flows discount
rate (annual) 17% 10% 16.9%
Impact on fair value of 10%
adverse change $ (6) $ (10) $ (4)
Impact on fair value of 20%
adverse change (11) (15) (8)
Interest rates on variable and
adjustable contracts (4) N/A N/A
Impact on fair value of 10%
adverse change $ (2) N/A N/A
Impact on fair value of 20%
adverse change (4) N/A N/A
(1) Fixed rate loans ramp up to 25 constant prepayment rate (CPR) over 16
months. Adjustable rate loans ramp up to 65 CPR over 16 months, ramping
down to 40 CPR over 12 months.Second liens ramp up to 35 CPR over 16
months, ramping down to 22 CPR over 26 months.Two-year hybrid loans
ramp up to 32 CPR over 14 months;ramping up to 65 CPR in month 25;
ramping to 31 CPR over 7 months.Three-year hybrid loans ramp up to 32
CPR over 14 months; ramping up to 60 CPR in month 37;ramping down to
31 CPR over 7 months.
(2) Defaults occur at the beginning of each period.They are applied on constant
percentage to the period’s beginning collateral balance.
(3) Assets rated Caa1 and lower are defaulted using a cumulative default rate
(CDR) vector based upon Moody’s Cumulative Default Rates for Caa1-C
securities. A 2 percent per annum CDR is applied to remaining assets with
ongoing recoveries of 40 percent and 80 percent on bonds and loans,
respectively.
(4) Based on the full forward 1-month LIBOR,6-month LIBOR or 1-year
constant maturity treasury rate through January 1, 2006 based on the
variable component of the variable rate contracts.
These sensitivities are hypothetical. Changes in fair value
based on a 10 percent variation in assumptions generally cannot
be extrapolated because the relationship of the change in
assumption to the change in fair value may not be linear. Also,
the effect of a variation in a particular assumption on the fair
value of the retained interests was calculated without changing
any other assumption. In reality, changes in one factor may
result in changes in another factor which might magnify or
counteract the sensitivities. For example, increases in market
interest rates may result in lower prepayments and increased
credit losses.
14 Investment Securities
Dominion holds marketable debt and equity securities classified
as available-for-sale. Those investments are reported as available-
for-sale securities on the Consolidated Balance Sheets in Other
Investments. In addition, the Millstone nuclear decommission-
ing trust funds holds marketable debt and equity securities clas-
sified as available-for-sale. See Note 16 for additional disclosure
of Dominion’s accounting for the Millstone decommissioning
trusts. Available-for-sale securities as of December 31, 2002 and
2001 are summarized below:
Total Total
Unrealized Unrealized
Gains Losses
Included in Included in
Fair Value AOCI AOCI
(millions)
2002
Equity securities $ 489 $ 1 $118
Debt securities 758 14 14
Total $1,247 $15 $132
2001
Equity securities $ 551 $11 $ 4
Debt securities 684 1 16
Total $1,235 $12 $ 20
Debt securities backed by mortgages and loans do not
have stated contractual maturities as borrowers have the right to
call or repay obligations with or without call or prepayment
penalties. At December 31, 2002, these debt securities totaled
$448 million. See Note 13 for a discussion of the assumed
weighted average life of those investments. The fair value of all
other debt securities at December 31, 2002 by contractual
maturity are as follows:
(millions)
Due in one year or less $4
Due after one year through five years 56
Due after five years through ten years 96
Due after ten years 146
Total $302
69
Dominion ’02 Annual Report