Dominion Power 2005 Annual Report Download - page 91

In February 2005 the CDO structure was recapitalized to allow
for additional assets. The recapitalization allows the collateral man-
ager a twelve month ramp-up period to invest in additional eligible
securities of a higher quality than previously held by the CDO struc-
ture. The additional assets will improve the credit quality and diver-
sity of the portfolio thereby reducing the overall risk of the portfolio.
At the closing date of the transaction in February 2005, DCI
exchanged its original $258 million Class B Notes, 3% paid-in-kind
(PIK) interest for $100 million Class B-1 Notes, 7.5% current pay
interest and $158 million Class B-2 Notes, 3% PIK interest. DCI
also has a commitment to fund up to $15 million of liquidity.
There were no mortgage securitizations in 2004 or 2005. Activ-
ity for the subordinated notes related to the new CDO structure,
retained interests from securitizations of CMOs and the CLO and
CDO retained interests is summarized as follows:
Retained
Interests —
CMO CLO/CDO
(millions)
Balance at January 1, 2004 $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
Interest income — 4
Proceeds from the sale of CDOs — (16)
Other cash received (1) (8)
Fair value adjustment (28) —
Balance at December 31, 2005 $ 38 $ 248
Key Economic Assumptions and Sensitivity Analysis
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 $3 million pre-tax impact on future results
of operations.
Impairment Losses
The table below presents a summary of asset impairment losses
associated with DCI operations.
Year Ended December 31, 2005 2004 2003
(millions)
Retained interests from CMO securitizations(1) $25 $46 $ 36
Retained interests from CLO/CDO securitizations(1) — 13 15
2003 CDO transactions —— 23
Venture capital and other equity investments(2) 10 26 16
Deferred tax assets(3) —— 26
Goodwill impairment(4) —— 18
Total $35 $85 $134
(1) As a result of economic conditions and historically low interest rates and the resulting impact
on credit losses and prepayment speeds, we recorded impairments of our retained interests
from CMO, CDO and CLO securitizations in 2005, 2004 and 2003. We updated our credit loss
and prepayment assumptions to reflect our recent experience.
(2) Other impairments were recorded primarily due to asset dispositions.
(3) Represents an increase in the valuation allowance related to federal tax loss carryforwards
not expected to be utilized.
(4) See Note 13 for discussion of goodwill impairments.
Note 28. Operating Segments
During the fourth quarter of 2004, we performed an evaluation
of our Dominion Clearinghouse (Clearinghouse) trading and market-
ing operations, which resulted in a decision to exit certain energy
trading activities and instead focus on the optimization of company
assets. The financial impact of the Clearinghouse’s optimization of
company assets is now reported as part of the results of the busi-
ness segments operating the related assets, in order to better
reflect the performance of the underlying assets. As such, activities
such as fuel management, hedging, selling the output of, contract-
ing and optimizing the Dominion Generation assets are reported in
the Dominion Generation segment. Activities related to corporate-
wide enterprise commodity risk management and optimization ser-
vices that are not focused on any particular business segment are
reported in the Corporate segment. Aggregation of gas supply and
associated gas trading and marketing activities, as well as the prior
year results of certain energy trading activities exited in connection
with the reorganization continue to be reported in the Dominion
Energy segment.
Additionally, in January 2005 in connection with the reorganiza-
tion, commodity derivative contracts held by the Clearinghouse were
assessed to determine if they contribute to the optimization of our
assets. As a result of this review, certain commodity derivative con-
tracts previously designated as held for trading purposes are now
held for non-trading purposes. Under our derivative income state-
ment classification policy described in Note 2, all changes in fair
value, including amounts realized upon settlement, related to the
reclassified contracts were previously presented in operating rev-
enue on a net basis. Upon reclassification as non-trading, all
unrealized changes in fair value and settlements related to those
derivative contracts that are financially settled are now reported in
other operations and maintenance expense. The statement of
income related amounts for those reclassified derivative sales con-
tracts that are physically settled are now presented in operating rev-
enue, while the statement of income related amounts for physically
settled purchase contracts are reported in operating expenses.
Our company is organized primarily on the basis of products and
services sold in the United States. We manage our operations
through the following segments:
Dominion Delivery includes our regulated electric and gas dis-
tribution and customer service business, as well as nonregulated
retail energy marketing operations.
Dominion Energy includes our tariff-based electric transmission,
natural gas transmission pipeline and underground natural gas stor-
age businesses and an LNG facility. It also includes certain natural
gas production and producer services, which consist of aggregation
of gas supply, market-based services related to gas transportation
and storage and associated gas trading and the prior year’s results
of certain energy trading activities exited in December 2004.
Dominion Generation includes the generation operations of
our electric utility and merchant fleet as well as energy marketing
and risk management activities associated with the optimization of
generation assets.
Dominion E&P includes our gas and oil exploration, develop-
ment and production operations. Operations are located in several
major producing basins in the lower 48 states, including the outer
Dominion 2005 89