Dominion Power 2003 Annual Report Download - page 91

89.Dominion 2003
Even in the capped rate environment, Dominion remains
exposed to numerous risks, including, among others, exposure
to potentially stranded costs, future environmental compliance
requirements, changes in tax laws, inflation and increased
capital costs. At December 31, 2003, Dominion’s exposure to
potentially stranded costs included: long-term power purchase
contracts that could ultimately be determined to be above market;
generating plants that could possibly become uneconomic in a
deregulated environment; and unfunded obligations for nuclear
plant decommissioning and postretirement benefits not yet
recognized in the financial statements.
24. Fair Value of Financial
Instruments
Substantially all of Dominion’s financial instruments are recorded
at fair value, with the exception of the instruments described
below that are reported at historical cost. Fair values have been
determined using available market information and valuation
methodologies considered appropriate by management. The
financial instruments’ carrying amounts and fair values as of
December 31, 2003 and 2002 were as follows:
2003 2002
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
(millions)
Long-term debt(1) $15,588 $16,514 $14,185 $14,990
Junior subordinated
notes payable to
affiliated trusts(2) 1,440 1,608 ——
Preferred securities of
subsidiary trusts(2) —— 1,397 1,441
(1) Fair value is estimated using market prices, where available, and interest rates
currently available for issuance of debt with similar terms and remaining
maturities. The carrying amount of debt issues with short-term maturities and
variable rates refinanced at current market rates is a reasonable estimate of
their fair value.
(2) Fair value is based on market quotations.
25. Credit Risk
Credit risk is the risk of financial loss to Dominion if counterpar-
ties fail to perform their contractual obligations. In order to mini-
mize overall credit risk, Dominion maintains credit policies,
including the evaluation of counterparty financial condition, col-
lateral requirements and the use of standardized agreements that
facilitate the netting of cash flows associated with a single coun-
terparty. In addition, counterparties make available collateral,
including letters of credit or cash held as margin deposits, as a
result of exceeding agreed-upon credit limits, or may be required
to prepay the transaction. Amounts reported as margin deposit
liabilities represent funds held by Dominion that resulted from var-
ious trading counterparties exceeding agreed-upon credit limits
established by Dominion. Amounts reported as margin deposit
assets represent funds held on deposit by various trading counter-
parties that resulted from Dominion exceeding agreed-upon
credit limits established by the counterparties. As of December
31, 2003 and 2002, Dominion had margin deposit assets of
$157 million and $149 million, respectively, and margin deposit
liabilities (reported in other current liabilities) of $12 million and
$22 million, respectively.
Dominion maintains a provision for credit losses based on fac-
tors surrounding the credit risk of its customers, historical trends
and other information. Management believes, based on Domin-
ion’s credit policies and its December 31, 2003 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.
As a diversified energy company, Dominion transacts with
major companies in the energy industry and with commercial
and residential energy consumers. These transactions principally
occur in the Northeast, Midwest and Mid-Atlantic regions of the
United States; however, management does not believe that this
geographic concentration contributes significantly to Dominion’s
overall exposure to credit risk. In addition, as a result of its large
and diverse customer base, Dominion is not exposed to a signifi-
cant concentration of credit risk for receivables arising from utility
electric and gas operations, including transmission services, and
retail energy sales.
Dominion’s exposure to credit risk is concentrated primarily
within its sales of gas and oil production and energy trading,
marketing and commodity hedging activities, as Dominion trans-
acts with a smaller, less diverse group of counterparties and
transactions may involve large notional volumes and potentially
volatile commodity prices. Energy trading, marketing and hedg-
ing activities include proprietary trading activities, marketing of
merchant generation output, structured transactions and the use
of financial contracts for enterprise-wide hedging purposes. At
December 31, 2003, gross credit exposure related to these trans-
actions totaled $879 million, reflecting the unrealized gains for
contracts carried at fair value plus any outstanding receivables
(net of payables, where netting agreements exist), prior to the
application of collateral. After the application of collateral,
Dominion’s credit exposure is reduced to $865 million. Of this
amount, investment grade counterparties represent 82% and no
single counterparty exceeded 9%.