Dominion Power 2004 Annual Report Download - page 44

D 2004/Page 42
Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
•Effectiveness of Dominion’s risk management activities and underlying
assessment of market conditions and related factors, including energy
commodity prices, basis, liquidity, volatility, counterparty credit risk,
availability of generation and transmission capacity, currency exchange
rates and interest rates;
•The cost of replacement electric energy in the event of longer-than-
expected or unscheduled generation outages;
•Contractual or regulatory restrictions on transfers of funds among
Dominion and its subsidiaries; and
•Timeliness of recovery for costs subject to cost-of-service utility rate
regulation.
Credit Risk
Dominion’s exposure to potential concentrations of credit risk results pri-
marily from its energy trading, marketing and hedging activities and sales
of gas and oil production. Presented below is a summary of Dominion’s
gross and net credit exposure as of December 31, 2004 for these activities.
Dominion calculates its gross credit exposure for each counterparty as the
unrealized fair value of derivative contracts plus any outstanding receiv-
ables (net of payables, where netting agreements exist), prior to the appli-
cation of collateral.
Gross Net
Credit Credit Credit
Exposure Collateral Exposure
(millions)
Investment grade(1) $ 784 $23 $ 761
Non-investment grade(2) 36 — 36
No external ratings:
Internally rated — investment grade(3) 299 — 299
Internally rated — non-investment grade(4) 150 — 150
Total $1,269 $23 $1,246
(1) Designations as investment grade are based upon minimum credit ratings assigned by
Moody’s Investors Service (Moody’s) and 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 16% of the total gross credit exposure.
(2) The five largest counterparty exposures, combined, for this category represented
approximately 2% of the total gross credit exposure.
(3) The five largest counterparty exposures, combined, for this category represented
approximately 14% of the total gross credit exposure.
(4) The five largest counterparty exposures, combined, for this category represented
approximately 3% of the total gross credit exposure.
Investing Cash Flows
During 2004, 2003 and 2002, investing activities resulted in net cash out-
flows of $1.3 billion, $3.4 billion, and $4.0 billion respectively. Significant
investing activities for 2004 included:
•$1.5 billion of capital expenditures for the construction and expansion
of generation facilities, environmental upgrades, purchase of nuclear
fuel, and construction and improvements of gas and electric transmis-
sion and distribution assets;
•$1.3 billion of capital expenditures for the purchase and development of
gas and oil producing properties, drilling and equipment costs and
undeveloped lease acquisitions;
•$729 million of proceeds from sales of gas and oil mineral rights and
properties;
•$490 million for the purchase of securities and $466 million for the sale
of securities, primarily related to investments held in nuclear decom-
missioning trusts; and
•$132 million in advances and $806 million in reimbursements related to
the Fairless generation project in Pennsylvania.
Financing Cash Flows and Liquidity
Dominion, Virginia Electric and Power Company (Virginia Power) and Con-
solidated Natural Gas Company (CNG) (collectively the Dominion Compa-
nies) rely on bank and capital markets as a significant source of funding for
capital requirements not satisfied by cash provided by the companies’
operations. As discussed further in the
Credit Ratings section below, the
Dominion Companies’ ability to borrow funds or issue securities and the
return demanded by investors are affected by the issuing company’s credit
ratings. In addition, the raising of external capital is subject to certain
regulatory approvals, including authorization by the SEC and, in the
case of Virginia Power, the Virginia State Corporation Commission
(Virginia Commission).
During 2004, net cash used in financing activities was $1.3 billion. Dur-
ing 2003 and 2002, net cash flows from financing activities were $853 mil-
lion and $1.3 billion, respectively. During 2004, the Dominion Companies
issued long-term debt (net of exchanged debt) and common stock totaling
approximately $1.7 billion. The proceeds were used primarily to repay debt.
Credit Facilities and Short-Term Debt
The Dominion Companies use short-term debt, primarily commercial paper,
to fund working capital requirements, as a bridge to long-term debt financ-
ing and as bridge financing for acquisitions, if applicable. The levels of bor-
rowing may vary significantly during the course of the year, depending
upon the timing and amount of cash requirements not satisfied by cash
from operations. At December 31, 2004, the Dominion Companies had com-
mitted lines of credit totaling $3.75 billion. Although there were no loans
outstanding, these lines of credit support commercial paper borrowings
and letter of credit issuances. At December 31, 2004, the Dominion Compa-
nies had the following commercial paper and letters of credit outstanding
and capacity available under credit facilities:
Outstanding Outstanding Facility
Facility Commercial Letters of Capacity
Limit Paper Credit Available
(millions)
Three-year revolving
credit facility(1) $1,500
Three-year revolving
credit facility(2) 750
Total joint credit facilities 2,250 $573 $183 $1,494
Three-year CNG
credit facility(3) 1,500 — 555 945
Totals $3,750 $573 $738 $2,439
(1) The $1.5 billion three-year revolving credit facility was entered into in May 2004 and
terminates in May 2007. This credit facility can also be used to support up to $500 million of
letters of credit.
(2) The $750 million three-year revolving credit facility was entered into in May 2002 and can
also be used to support up to $200 million of letters of credit. Dominion expects to renew this
facility prior to its maturity in May 2005.
(3) The $1.5 billion three-year credit facility is used to support the issuance of letters of credit
and commercial paper by CNG to fund collateral requirements under its gas and oil hedging
program. The facility was entered into in August 2004 and terminates in August 2007.
In addition to the facilities above, in June and August of 2004, CNG
entered into two $100 million letter of credit agreements that terminate in
June 2007 and August 2009, respectively. Additionally, in October 2004,