Dominion Power 2003 Annual Report Download - page 92

90.Dominion 2003
Notes to Consolidated Financial Statements, Continued
26. Equity Method Investments and
Affiliated Transactions
At December 31, 2003 and 2002, Dominion’s equity method
investments totaled $437 million and $503 million, respectively,
and equity earnings on these investments totaled $25 million in
2003, $11 million in 2002 and $36 million in 2001. Dominion’s
equity method investments are reported on the Consolidated Bal-
ance Sheets in other investments. The amounts reported for 2002
include Dominion’s investment in DFV, which, as discussed in
Note 9, Dominion began consolidating in 2003. See Note 27
for discussion of DCI’s equity method investments.
International Investments
CNG International (CNGI) was engaged in energy-related activi-
ties outside of the United States, primarily through equity invest-
ments in Australia and Argentina. After completing the CNG
acquisition, Dominion’s management committed to a plan to dis-
pose of the entire CNGI operation consistent with its strategy to
focus on its core business. These assets are classified as part of
assets held for sale in other current assets in the Consolidated
Balance Sheets. As of December 31, 2002, the CNGI assets
included investments in property, plant and equipment totaling
$55 million and equity method investments totaling $83 million.
During 2003, Dominion recognized impairment losses totaling
$84 million ($69 million after-tax) related primarily to investments
in a pipeline business located in Australia and a small generation
facility in Kauai, Hawaii that was sold in December 2003 for
cash proceeds of $42 million. These impairment losses repre-
sented adjustments to the assets’ carrying amounts to reflect
Dominion’s current evaluation of fair market value less estimated
costs to sell, which were derived from a combination of actual
2003 transactions, management estimates, and other fair market
value indicators. Dominion expects to complete the sale of the
remaining assets by December 31, 2004.
27. Dominion Capital, Inc. (DCI)
As of December 31, 2003, Dominion has substantially exited the
core DCI financial services, commercial lending and residential
mortgage lending businesses.
Securitizations of Financial Assets
At December 31, 2003 and 2002, DCI held $413 million and
$470 million, respectively, of retained interests from the securiti-
zation of financial assets, which are classified as available-for-
sale securities. The retained interests resulted from prior year
securitizations of commercial loans receivable in collateralized
loan obligation (CLO), collateralized debt obligation (CDO) and
collateralized mortgage obligation (CMO) transactions.
In connection with Dominion’s ongoing efforts to divest its
remaining financial services investments, Dominion executed cer-
tain agreements in the fourth quarter of 2003 that resulted in the
sale of commercial finance receivables, a note receivable, an
undivided interest in a lease and equity investments to a new
CDO structure. In exchange for the sale of these assets with an
aggregate carrying amount of $123 million, Dominion received
$113 million cash and a $7 million 3% subordinated secured
note in the new CDO structure and recorded an impairment
charge of $3 million. The equity interests in the new CDO struc-
ture, a voting interest entity, are held by an entity that is not affili-
ated with Dominion.
Simultaneous with the above transaction, the new CDO struc-
ture acquired all of the loans held by two special purpose trusts
that were established in 2001 and 2000 to facilitate DCI’s securi-
tization of certain loan receivables. DCI’s original transfers of the
loans to the CLO trusts qualified as sales under SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. Only after receiving consents from
non-affiliated third parties, the CLO trusts’ governing agreements
were amended to permit the sale of their financial assets into the
new CDO structure in 2003. In consideration for the sale of loans
to the new CDO structure, the trusts received $243 million of sub-
ordinated secured 3% notes in the new CDO structure and
$119 million in cash, which was used by the CLO trusts to redeem
all of their outstanding senior debt securities. As of December 31,
2003, Dominion still held residual interests in the CLO trusts, the
value of which depended solely on the subordinated 3% notes
issued by the new CDO. In connection with its assessment of
revised cash flows expected to be received in relation to the
residual CLO interests, Dominion performed an impairment
analysis based on EITF Issue No. 99-20, Recognition of Interest
Income and Impairment of Purchased and Retained Beneficial
Interests in Secured Financial Assets (EITF 99-20), and recorded
an impairment charge of $15 million. Dominion also expensed
$19 million of deferred transaction and related costs that had
been incurred in the original CLO securitization transactions.
Both CLO trusts were liquidated in early 2004 and Dominion’s
CLO residual interests were exchanged at that time for the afore-
mentioned $243 million subordinated secured 3% notes. Domin-
ion is obligated under the new CDO agreements to fund up to
$55 million through 2007 for certain outstanding revolving loan
commitments transferred to the new CDO structure and to pro-
vide a liquidity facility to the new CDO structure of up to $30 mil-
lion. Both Dominion facilities are senior in right of payment to
existing subordinated notes and equity interests in the new
CDO structure.