Dominion Power 2003 Annual Report Download - page 93

91.Dominion 2003
There were no mortgage securitizations in 2002 or 2003.
Activity for the retained interests from securitizations of CMO,
CLO and CDO retained interests is summarized as follows:
Retained
Interests—
CMO CLO/CDO
(millions)
Balance at January 1, 2002 $269 $283
Amortization (5) —
Cash received (45) (2)
Loss on securities (19) —
Fair value adjustment (11) —
Balance at December 31, 2002 189 281
Retained securitization —7
Amortization (2) —
Cash received (10) (1)
Fair value adjustment (36) (15)
Balance at December 31, 2003 $141 $272
Key Economic Assumptions and Sensitivity Analyses
Retained interests in CLOs and CDOs are subject to credit loss
and interest rate risk. Retained interests in CMOs are subject to
credit loss, prepayment and interest rate risk. Given the declining
residual balances and the lower weighted-average lives due to
the passage of time, adverse changes of up to 20% in assumed
prepayment speeds, credit losses and interest rates are estimated
in each case to have less than a $10 million pre-tax impact on
future results of operations.
Impairment Losses
The table below presents a summary of asset impairment losses
associated with DCI operations. All impairments recorded by the
financial services subsidiary are reported as other operations
and maintenance expense.
2003 2002 2001
(millions)
Retained interests from CMO securitizations $36 $11 $ 21
Retained interests from CLO/CDO
securitizations 15 —81
Fourth quarter CDO transaction 23 ——
Venture capital and other equity investments 16 —64
Deferred tax assets 26 ——
Goodwill impairment 18 13 —
Loans receivable ——94
Real-estate projects and other ——21
Total $134 $24 $281
2003
On a quarterly basis, Dominion assesses for impairment its
retained interests from CMO securitizations using the guidance
contained in EITF 99-20. As a result of economic conditions and
historically low interest rates and the resulting impact on credit
losses and prepayment speeds, Dominion recorded impairments
totaling $36 million throughout 2003. Given the expected stabi-
lization of credit losses and prepayment speeds in 2004 and
beyond, Dominion’s remaining projected credit loss and prepay-
ment experience is expected to track closely with the current
assumptions, which were derived from actual 1996–2001 Saxon
Mortgage, Inc. loss and prepayment experience.
Other assets acquired through foreclosures were determined
to be impaired based on offers received. The fourth quarter
impairment associated with the retained interests from CLO secu-
ritizations and the fourth quarter CDO transaction are discussed
above. See Note 7 for discussion of deferred tax assets and
Note 13 for discussion of goodwill impairments.
2002 and 2001
In 2002, Dominion recognized an $11 million impairment on
retained interests in CMO securitizations to reflect revised pre-
payment speed assumptions as part of routine quarterly reviews.
In addition, a DCI subsidiary received an unfavorable arbitration
ruling that affected its ability to recover disputed amounts for past
and future performance under a contract with a major customer.
See Note 13 for discussion of goodwill impairments.
In 2001, DCI recognized impairment losses of $281 million on
various investments at DCI. In light of actual loan loss experience
and actual prepayment activity of certain mortgage and commer-
cial loans in the securitization trusts, Dominion increased its loan
loss and prepayment speed assumptions used to estimate the fair
value of its retained interests in mortgage, CLO and CDO securitiza-
tions. The other impairments and loss provisions reflected Domin-
ion’s estimate of net realizable values of loans and other investments
associated with the dramatically weakened economy and increas-
ing instances of bankruptcies, defaults and major restructurings that
significantly diminished investment values. Dominion’s valuation
methodologies and assumptions varied by investment and included
cash flow analysis, signed contracts, independent third-party
appraisals and, in certain cases, liquidation value.