Dominion Power 2004 Annual Report Download - page 93

26. Dominion Capital, Inc.
As of December 31, 2004, Dominion has substantially exited the core DCI
financial services, commercial lending and residential mortgage lending
businesses.
Dominion is required by the SEC under the 1935 Act to divest of
all remaining DCI investment holdings by January 2006. Dominion’s
Consolidated Balance Sheet reflects the following DCI assets as of
December 31, 2004:
Amount
(millions)
Current assets $26
Available for sale securities 335
Other long-term investments 102
Property, plant and equipment, net 15
Deferred charges and other assets 121
Total $599
Securitizations of Financial Assets
At December 31, 2004 and 2003, DCI held $335 million and $413 million,
respectively, of retained interests from the securitization 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 obliga-
tion (CDO) and collateralized mortgage obligation (CMO) transactions.
In connection with Dominion’s ongoing efforts to divest its remaining
financial services investments, Dominion executed certain 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 structure, a voting interest entity, are
held by an entity that is not affiliated with Dominion.
Simultaneous with the above transaction, the new CDO structure
acquired all of the loans held by two special purpose trusts that were
established in 2001 and 2000 to facilitate DCI’s securitization of certain
loan receivables. DCI’s original transfers of the loans to the CLO trusts qual-
ified 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 agree-
ments 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 subordinated
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 a review of the
remaining assets in the CLO trusts, DCI recorded impairments totaling $23
million in 2003. Dominion received its distribution of the new CDO notes in
the first quarter of 2004 upon liquidation of the trusts.
There were no mortgage securitizations in 2003 or 2004. Activity for the
subordinated notes related to the new CDO structure, retained interests
from securitizations of CMO’s and the CLO and CDO retained interests is
summarized as follows:
Retained
Interests —
CMO CLO/CDO
(millions)
Balance at January 1, 2003 $189 $ 281
Amortization (2) —
Cash received (10) (1)
Retained securitization — 7
Fair value adjustment (36) (15)
Balance at December 31, 2003 141 272
Liquidation of retained interest in CLO trusts — (231)
Distributions of new CDO notes to Dominion — 235
Interest income — 9
Amortization (1) —
Cash received (27) (4)
Fair value adjustment (46) (13)
Balance at December 31, 2004 $ 67 $ 268
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 associ-
ated with DCI operations.
Year Ended December 31, 2004 2003 2002
(millions)
Retained interests from CMO securitizations(1) $46 $ 36 $11
Retained interests from CLO/CDO securitizations(1) 13 15 —
2003 CDO transaction — 23 —
Venture capital and other equity investments(2) 26 16 —
Deferred tax assets(3) — 26 —
Goodwill impairment(4) — 18 13
Total $85 $134 $24
(1) As a result of economic conditions and historically low interest rates and the resulting impact
on credit losses and prepayment speeds, Dominion recorded impairments of its retained
interests from CMO, CDO and CLO securitizations in 2004, 2003 and 2002. Dominion updated
its credit loss and prepayment assumptions to reflect its recent experience.
(2) Other impairments were recorded primarily due to asset dispositions.
(3) See Note 7 for discussion of deferred income taxes.
(4) See Note 13 for discussion of goodwill impairments.
D 2004/Page 91