Dominion Power 2005 Annual Report Download - page 43

Dominion 2005 41
•Effectiveness of our 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 our subsidiaries; and
•Timeliness of recovery for costs subject to cost-of-service utility
rate regulation.
Credit Risk
Exposure to potential concentrations of credit risk results primarily
from our energy marketing and risk management activities and
sales of gas and oil production. Presented below is a summary of
our gross and net credit exposure as of December 31, 2005 for
these activities. We calculate our gross credit exposure for each
counterparty as the unrealized fair value of derivative contracts plus
any outstanding receivables (net of payables, where netting agree-
ments exist), prior to the application of collateral.
Gross Net
Credit Credit Credit
Exposure Collateral Exposure
(millions)
Investment grade(1) $ 931 $143 $ 788
Non-investment grade(2) 26 — 26
No external ratings:
Internally rated — investment grade(3) 46 — 46
Internally rated — non-investment grade(4) 343 — 343
Total $1,346 $143 $1,203
(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 19% of the total net credit exposure.
(2) The five largest counterparty exposures, combined, for this category represented
approximately 2% of the total net credit exposure.
(3) The five largest counterparty exposures, combined, for this category represented
approximately 4% of the total net credit exposure.
(4) The five largest counterparty exposures, combined, for this category represented
approximately 7% of the total net credit exposure.
Investing Cash Flows
During 2005, 2004 and 2003, investing activities resulted in net
cash outflows of $3.4 billion, $1.2 billion, and $3.4 billion respec-
tively. Significant investing activities for 2005 included:
•$1.7 billion of capital expenditures for the construction and
expansion of generation facilities, environmental upgrades, pur-
chase of nuclear fuel, construction and improvements of gas
and electric transmission and distribution assets and the cost of
acquiring a nonutility generating facility;
•$1.7 billion of capital expenditures for the purchase and devel-
opment of gas and oil producing properties, drilling and equip-
ment costs and undeveloped lease acquisitions;
•$877 million primarily related to the acquisition of the Dominion
New England power plants and the Kewaunee power station;
and
•$854 million for the purchase of securities; partially offset by
•$754 million of proceeds from the sale of securities;
•$595 million of proceeds from sales of gas and oil mineral
rights and properties; and
•$234 million of proceeds from sales of excess emissions
allowances.
Financing Cash Flows and Liquidity
We rely on banks and capital markets as significant sources of
funding for capital requirements not satisfied by cash provided by
the companies’ operations. As discussed further in the Credit Rat-
ings section below, our 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 registration with
the SEC and, in the case of Virginia Electric and Power Company
(Virginia Power), approval by the Virginia State Corporation Com-
mission (Virginia Commission).
In December 2005, the SEC adopted rules that modify the reg-
istration, communications and offering processes under the Securi-
ties Act of 1933. The rules streamline the shelf registration process
to provide registrants with more timely access to capital. Under the
new rules, Dominion and Virginia Power meet the definition of a
well-known seasoned issuer. This allows them to use an automatic
shelf registration statement to register any offering of securities,
other than those for business combination transactions.
During 2005 and 2003, net cash flows from financing activities
were $522 million and $853 million, respectively. During 2004 net
cash used in financing activities was $1.3 billion. Significant financ-
ing activities in 2005 included:
•$2.3 billion from the issuance of long-term debt;
•$1.0 billion from the net issuance of short-term debt;
•$664 million from the issuance of common stock; partially
offset by
•$2.2 billion for the repayment of long-term debt;
•$923 million of common dividend payments; and
•$276 million for the repurchase of common stock.
Credit Facilities and Short-Term Debt
We use short-term debt, primarily commercial paper, to fund work-
ing capital requirements, as a bridge to long-term debt financing
and as bridge financing for acquisitions, if applicable. The level of
our borrowings may vary significantly during the course of the year,
depending upon the timing and amount of cash requirements not
satisfied by cash from operations. In addition, we utilize cash and
letters of credit to fund collateral requirements under our commodi-
ties hedging program. Collateral requirements are impacted by com-
modity prices, hedging levels and our credit quality and the credit
quality of our counterparties. In May 2005, we entered into a $2.5
billion five-year revolving credit facility that replaced our $1.5 billion
three-year facility dated May 2004 and our $750 million three-year
facility dated May 2002. In August 2005, CNG entered into a $1.75
billion five-year facility that replaced its $1.5 billion three-year facil-
ity dated August 2004. At December 31, 2005, we had committed
lines of credit totaling $4.25 billion. Although there were no loans
outstanding, these lines of credit support commercial paper borrow-
ings and letter of credit issuances. At December 31, 2005, we had