Dominion Power 2004 Annual Report Download - page 92

Notes to Consolidated Financial Statements, Continued
24. Credit Risk
Credit risk is the risk of financial loss to Dominion if counterparties fail to
perform their contractual obligations. In order to minimize overall credit
risk, Dominion maintains credit policies, including the evaluation of coun-
terparty financial condition, collateral requirements and the use of stan-
dardized agreements that facilitate the netting of cash flows associated
with a single counterparty. In addition, counterparties may 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 various trading counterparties
exceeding agreed-upon credit limits established by Dominion. Amounts
reported as margin deposit assets represent funds held on deposit by vari-
ous trading counterparties that resulted from Dominion exceeding agreed-
upon credit limits established by the counterparties. As of December 31,
2004 and 2003, Dominion had margin deposit assets (reported in other
current assets) of $179 million and $157 million, respectively, and margin
deposit liabilities (reported in other current liabilities) of $28 million and
$12 million, respectively.
Dominion maintains a provision for credit losses based on factors sur-
rounding the credit risk of its customers, historical trends and other infor-
mation. Management believes, based on Dominion’s credit policies and its
December 31, 2004 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 com-
panies 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 significant
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 commod-
ity hedging activities, as Dominion transacts with a smaller, less diverse
group of counterparties and transactions may involve large notional vol-
umes and potentially volatile commodity prices. Energy trading, marketing
and hedging activities include trading of energy-related commodities, mar-
keting of merchant generation output, structured transactions and the use
of financial contracts for enterprise-wide hedging purposes. At December
31, 2004, gross credit exposure related to these transactions totaled $1.27
billion, reflecting the unrealized gains for contracts carried at fair value
plus any outstanding receivables (net of payables, where netting agree-
ments exist), prior to the application of collateral. After the application of
collateral, Dominion’s credit exposure is reduced to $1.25 billion. Of this
amount, investment grade counterparties represent 85% and no single
counterparty exceeded 6%.
25. Equity Method Investments and Affiliated Transactions
At December 31, 2004 and 2003, Dominion’s equity method investments
totaled $387 million and $437 million, respectively, and equity earnings on
these investments totaled $34 million in 2004, $25 million in 2003 and $11
million in 2002. Dominion received dividends from these investments of
$37 million, $28 million and $36 million in 2004, 2003 and 2002, respec-
tively. Dominion’s equity method investments are reported on the Consoli-
dated Balance Sheets in other investments, except for the international
investments discussed below, which are classified as part of assets held
for sale in other current assets. Equity earnings on these investments are
reported on the Consolidated Statements of Income in other income (loss).
See Note 26 for discussion of DCI’s equity method investments.
International Investments
CNGI was engaged in energy-related activities outside of the United
States, primarily through equity investments in Australia and Argentina.
After completing the CNG acquisition, Dominion’s management committed
to a plan to dispose of the entire CNGI operation consistent with its strat-
egy to focus on its core business.
During 2003, Dominion recognized impairment losses totaling $84 mil-
lion ($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 represented adjustments to the assets’ carrying
amounts to reflect Dominion’s then 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.
In 2004, Dominion received cash proceeds of $52 million and recog-
nized a gain in other income of $9 million from the sale of a portion of the
Australian pipeline business in which CNGI held an investment. Dominion
also recognized an $18 million benefit from an adjustment to the carrying
amount of this investment to reflect its then current estimate of fair value,
less estimated costs to sell.
At December 31, 2004, Dominion’s remaining CNGI investment is
accounted for at fair value. Management expects this $4 million invest-
ment to be sold by the end of 2006.
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