Dominion Power 2005 Annual Report Download - page 46

Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
44 Dominion 2005
unsecured debt securities. Standard & Poor’s concluded that fuel
expenses in excess of rate recovery at Virginia Power and delays in
gas and oil production at CNG have caused a deterioration in
Dominion’s financial performance to a level more commensurate
with a BBB rating and that there will be no material improvement in
Dominion’s credit profile before midyear 2007. In January 2006,
Moody’s announced that it had placed the credit ratings of the
Dominion Companies under review for possible downgrade, citing
recent financial performance that was weaker than expected, a
decline in funds from operations and higher than expected lever-
age. Moody’s review is expected to be completed within three
months and will focus on the Dominion Companies’ expected finan-
cial profile over the next 12-18 months. As of February 1, 2006,
Fitch Ratings Ltd. (Fitch) and Standard & Poor’s maintain a stable
outlook for their ratings of the Dominion Companies.
Generally, a downgrade in an individual company’s credit rating
would not restrict its ability to raise short-term and long-term financ-
ing as long as its credit rating remains “investment grade,” but it
would increase the cost of borrowing. We work closely with Fitch,
Moody’s and Standard & Poor’s with the objective of maintaining our
current credit ratings. In order to maintain our current ratings, we
may find it necessary to modify our business plans and such
changes may adversely affect our growth and earnings per share.
Debt Covenants
As part of borrowing funds and issuing debt (both short-term and
long-term) or preferred securities, the Dominion Companies must
enter into enabling agreements. These agreements contain
covenants that, in the event of default, could result in the accelera-
tion of principal and interest payments; restrictions on distributions
related to our capital stock, including dividends, redemptions, repur-
chases, liquidation payments or guarantee payments; and in some
cases, the termination of credit commitments unless a waiver of
such requirements is agreed to by the lenders/security holders.
These provisions are customary, with each agreement specifying
which covenants apply. These provisions are not necessarily unique
to the Dominion Companies. Some of the typical covenants include:
•The timely payment of principal and interest;
•Information requirements, including submitting financial reports
filed with the SEC to lenders;
•Performance obligations, audits/inspections, continuation of the
basic nature of business, restrictions on certain matters related
to merger or consolidation, restrictions on disposition of sub-
stantial assets;
•Compliance with collateral minimums or requirements related to
mortgage bonds; and
•Limitations on liens.
We monitor the covenants on a regular basis in order to ensure
that events of default will not occur. As of December 31, 2005,
there were no events of default under the Dominion Companies’
covenants.
Dividend Restrictions
The Public Utility Holding Company Act of 1935 (1935 Act) and
related regulations issued by the SEC impose restrictions on the
transfer and receipt of funds by a registered holding company from
its subsidiaries, including a general prohibition against loans or
advances being made by the subsidiaries to benefit the registered
holding company. Under the 1935 Act, registered holding compa-
nies and their subsidiaries may pay dividends only from retained
earnings, unless the SEC specifically authorizes payments from
other capital accounts. Our ability to pay dividends on our common
stock at declared rates was not impacted by these restrictions dur-
ing 2005, 2004 and 2003. We will not be bound by the foregoing
restrictions on dividends imposed by the 1935 Act after February 8,
2006, the effective date on which the 1935 Act was repealed
under the Energy Policy Act of 2005.
Future Cash Payments for Contractual Obligations and
Planned Capital Expenditures
We are party to numerous contracts and arrangements obligating
us to make cash payments in future years. These contracts include
financing arrangements such as debt agreements and leases, as
well as contracts for the purchase of goods and services and finan-
cial derivatives. Presented below is a table summarizing cash pay-
ments that may result from contracts to which we are a party as of
December 31, 2005. For purchase obligations and other liabilities,
amounts are based upon contract terms, including fixed and mini-
mum quantities to be purchased at fixed or market-based prices.
Actual cash payments will be based upon actual quantities pur-
chased and prices paid and will likely differ from amounts pre-
sented below. The table excludes all amounts classified as current
liabilities on our Consolidated Balance Sheets, other than current
maturities of long-term debt, interest payable, and certain deriva-
tive instruments. The majority of our current liabilities will be paid
in cash in 2006.
Less More
than 1 1-3 3-5 than 5
Yea r Yea r s Yea r s Ye ar s To t al
(millions)
Long-term debt(1) $2,330 $ 3,661 $1,900 $ 9,179 $17,070
Interest payments(2) 1,004 1,557 1,294 7,056 10,911
Leases 131 284 238 345 998
Purchase obligations(3):
Purchased electric capacity
for utility operations 441 805 718 2,536 4,500
Fuel to be used for utility
operations 772 819 501 640 2,732
Fuel to be used for
nonregulated operations 256 44 17 — 317
Production handling 54 87 36 13 190
Pipeline transportation
and storage 92 145 106 93 436
Energy commodity purchases
for resale(4) 1,076 283 9 1 1,369
Other 316 198 40 15 569
Other long-term liabilities(5):
Financial derivatives —
commodities(4) 2,566 2,070 2 — 4,638
Other contractual obligations(6) 74 103 49 32 258
Total cash payments $9,112 $10,056 $4,910 $19,910 $43,988
(1) Based on stated maturity dates rather than the earlier redemption dates that could be
elected by instrument holders.
(2) Does not reflect our ability to defer distributions related to our junior subordinated notes
payable to affiliated trusts.
(3) Amounts exclude open purchase orders for services that are provided on demand, the timing
of which cannot be determined.
(4) Represents the summation of settlement amounts, by contracts, due from us if all physical or
financial transactions among our counterparties and us were liquidated and terminated.
(5) Excludes regulatory liabilities, AROs and employee benefit plan obligations that are not
contractually fixed as to timing and amount. See Notes 14, 15 and 22 to our Consolidated
Financial Statements. Deferred income taxes are also excluded since cash payments are
based primarily on taxable income for each discrete fiscal year.
(6) Includes interest rate swap agreements.