Dominion Power 2002 Annual Report Download - page 91

policies and its December 31, 2002 provision for credit losses,
that it is unlikely that a material adverse effect on its financial
position, results of operations or cash flows would occur as a
result of counterparty nonperformance.
Dominion calculates its gross credit exposure for each
counterparty as the unrealized fair value of derivative and
energy trading contracts plus any outstanding receivables (net
of payables, where netting agreements exist), prior to the appli-
cation of collateral. In the calculation of net credit exposure,
Dominion’s gross exposure is reduced by collateral made avail-
able by counterparties, including letters of credit and cash
received by Dominion and held as margin deposits. Presented
below is a summary of Dominion’s gross and net credit exposure
as of December 31, 2002. The amounts presented exclude
accounts receivable for retail electric and gas sales and services,
regulated transmission services and Dominion’s provision for
credit losses.
At December 31,2002
Credit Exposure
before Credit Net Credit
Credit Collateral Collateral Exposure
(millions)
Investment grade(1) $486 $31 $455
Non-investment grade(2) 100 24 76
No external ratings:
Internal rated—
investment grade(3) 206 — 206
Internal rated—
non-investment grade(4) 143 — 143
Total $935 $55 $880
(1) This category includes counterparties with minimum credit ratings of Baa3
assigned by Moody’s Investor Service (Moody’s) and BBB—assigned by
Standard & Poor’s Rating Group, a division of the McGraw-Hill Companies,
Inc. (Standard & Poor’s).The five largest counterparty exposures,
combined, for this category represented approximately 13 percent of the
total gross credit exposure.
(2) This category includes counterparties with credit ratings that are below
investment grade.The five largest counterparty exposures, combined,
for this category represented approximately 6 percent of the total gross
credit exposure.
(3) This category includes counterparties that have not been rated by Moody’s
or Standard & Poor’s, but are considered investment grade based on
Dominion’s evaluation of the counterparty’s creditworthiness.The five
largest counterparty exposures,combined, for this category represented
approximately 18 percent of the total gross credit exposure.
(4) This category includes counterparties that have not been rated by Moody’s
or Standard & Poor’s, and are considered non-investment grade based on
Dominion’s evaluation of the counterparty’s creditworthiness.The five
largest counterparty exposures,combined, for this category represented
approximately 3 percent of the total gross credit exposure.
30 Dominion Fiber Ventures, LLC
Dominion has a 50 percent voting interest in DFV, a joint ven-
ture with a third-party investor trust (Investor Trust). DFV was
established to fund the development of its principal investment,
Dominion Telecom, Inc. (DTI), a telecommunications busi-
ness. DTI is a facilities-based interchange and emerging local
carrier that provides broadband solutions to wholesale cus-
tomers throughout the eastern United States. Due to the veto
rights and substantive equity at risk from the Investor Trust,
Dominion’s investment in DFV is accounted for using the
equity method. See Note 31.
In connection with its formation, DFV issued $665 million
of 7.05 percent senior secured notes due March 2005 (DFV
Senior Notes).
The DFV Senior Notes were secured in part by Dominion
convertible preferred stock held in trust. Dominion was the
beneficial owner of the trust and included it in the preparation
of its Consolidated Financial Statements. Prior to Dominion’s
repurchase of substantially all of the outstanding DFV Senior
Notes in February 2003, as described below, the preferred stock
would have been subject to being remarketed in an amount
sufficient to retire the DFV Senior Notes at maturity or earlier
if the credit ratings for Dominion Resources, Inc. senior unse-
cured debt were BBB– or Baa3 during a period when the clos-
ing price of Dominion’s common stock was below $45.97 for
ten consecutive trading days. If the remarketing of the preferred
stock occurred, the convertible preferred stock would have
been considered in the calculation of diluted earnings per
share of Dominion’s common stock or could have resulted
in the issuance of additional shares of Dominion common
stock, if converted.
At the end of 2002 and 2001, DTI and DFV had loaned
Dominion a total of $140 million and $367 million, respec-
tively, which are reported as notes payable—affiliates and securi-
ties due within one year on the Consolidated Balance Sheets. In
2002 and 2001, Dominion incurred $13 million and $23 mil-
lion of interest expense on the loans, respectively. For manage-
ment and other support services, Dominion billed DTI $35
million and $20 million in 2002 and 2001, respectively.
Subsequent Event
On January 23, 2003, Dominion and DFV made a tender and
consent offering for the DFV Senior Notes. Under the terms
of the offering, DFV sought the consent of the note holders to
remove the stock price and credit downgrade trigger described
above as well as certain other related modifications to the
indenture. Dominion offered to purchase for cash all of the out-
standing notes. The consent and tender offer was successful,
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Dominion ’02 Annual Report