Dominion Power 2004 Annual Report Download - page 46

D 2004/Page 44
Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
connection with the forward agreement, MLI borrowed an equal number of
shares of Dominion’s common stock from stock lenders and, at Dominion’s
request, sold the borrowed shares to J.P. Morgan Securities Inc. (JPM)
under a purchase agreement among Dominion, MLI and JPM. JPM subse-
quently offered the borrowed shares to the public. Dominion accounted for
the forward agreement as equity at its initial fair value but did not receive
any proceeds from the sale of the borrowed shares.
The use of a forward agreement allows Dominion to avoid equity
market uncertainty by pricing a stock offering under then existing market
conditions, while mitigating share dilution by postponing the issuance of
stock until funds are needed. Except in specified circumstances or events
that would require physical share settlement, Dominion may elect to settle
the forward agreement by means of a physical share, cash or net share set-
tlement and may also elect to settle the agreement in whole, or in part,
earlier than the stated maturity date at fixed settlement prices. Under
either a physical share or net share settlement, the maximum number of
shares deliverable by Dominion under the terms of the forward agreement
was limited to the 10 million shares specified in the two tranches. Assum-
ing gross share settlement of all shares under the forward agreement,
Dominion would have received aggregate proceeds of approximately
$644 million, based on maturity forward prices of $64.62 per share for the
2 million shares included in the first tranche and $64.34 per share for the
8 million shares included in the second tranche.
However, Dominion elected to cash settle the first tranche in December
2004 and made a payment to MLI for $5.8 million, representing the differ-
ence between Dominion’s share price and the applicable forward sale
price, multiplied by the 2 million shares. Dominion recorded the settlement
payment as a reduction to common stock in its Consolidated Balance
Sheet. Additionally, Dominion elected to cash settle 3 million shares of
the second tranche in February 2005 and made a payment to MLI for
$17.4 million.
The remaining 5 million shares of the second tranche must be settled
by May 17, 2005. If gross share settlement were elected for the remainder
of the second tranche at its maturity date, Dominion would receive aggre-
gate proceeds of approximately $322 million and would deliver 5 million of
its common shares. In the event any or all of the proceeds are not needed,
Dominion has the option to either cash settle or net share settle the
remainder of the second tranche of the forward agreement in whole, or in
part, and may elect settlement earlier than the stated maturity date. If
Dominion elects to cash or net share settle any portion of the remainder of
the second tranche, the payment is based on the difference between
Dominion’s share price and the applicable forward sale price for the second
tranche, multiplied by the number of shares being settled.
If, at December 31, 2004, Dominion had elected a cash settlement of
the 8 million shares in the second tranche, Dominion would have owed MLI
$28 million, of which, $18 million would have represented settlement of the
5 million shares remaining in the second tranche after the February 2005
settlement. If, at the time of cash settlement, Dominion’s current share
price were lower than the forward sale price, Dominion would receive a
payment from MLI. For every dollar increase (decrease) in the value of
Dominion’s stock, the value of the settlement of the shares remaining in
the second tranche from MLI’s perspective would increase (decrease) by
$5 million.
Dominion expects to use proceeds received from physical share settle-
ments under the remainder of the second tranche of the forward agree-
ment to fund part of the cost of acquiring the Kewaunee nuclear power
plant in Wisconsin for $220 million (which is expected to close in the first
half of 2005) and the acquisition of three electric generating stations from
USGen for $642 million (which closed on January 1, 2005).
Amounts Available under Shelf Registrations
At February 1, 2005, Dominion Resources, Inc., Virginia Power, and CNG had
approximately $941 million, $670 million, and $900 million, respectively, of
available capacity under currently effective shelf registrations. Securities
that may be issued under these shelf registrations, depending upon the
registrant, include senior notes (including medium-term notes), subordi-
nated notes, first and refunding mortgage bonds, trust preferred securities,
preferred stock and common stock.
In addition, Dominion Resources, Inc., under a separate shelf registra-
tion has 6.9 million shares of common stock available exclusively for deliv-
ery against stock purchase contracts associated with outstanding
equity-linked debt securities.
In December 2004, the SEC granted Dominion’s request for financing
authorization under the 1935 Act through December 31, 2007. This authority
replaced the previous financing authority granted by the SEC, which
expired December 31, 2004.
Credit Ratings
Credit ratings are intended to provide banks and capital market partici-
pants with a framework for comparing the credit quality of securities and
are not a recommendation to buy, sell or hold securities. Management
believes that the current credit ratings of the Dominion Companies provide
sufficient access to the capital markets. However, disruptions in the bank-
ing and capital markets not specifically related to Dominion may affect the
Dominion Companies’ ability to access these funding sources or cause an
increase in the return required by investors.
Both quantitative (financial strength) and qualitative (business or oper-
ating characteristics) factors are considered by the credit rating agencies in
establishing an individual company’s credit rating. Credit ratings should be
evaluated independently and are subject to revision or withdrawal at any
time by the assigning rating organization. The credit ratings for the
Dominion Companies are most affected by each company’s financial pro-
file, mix of regulated and nonregulated businesses and respective cash
flows, changes in methodologies used by the rating agencies and “event
risk,” if applicable, such as major acquisitions.