Dominion Power 2006 Annual Report Download - page 45

MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
We depend on both internal and external sources of liquidity to
provide working capital and to fund capital requirements. Short-
term cash requirements not met by cash provided by operations
are generally satisfied with proceeds from short-term borrowings.
Long-term cash needs are met through sales of securities and
additional long-term financing.
At December 31, 2006, we had $3.0 billion of unused
capacity under our credit facilities. See additional discussion
under Credit Facilities andShort-Term Debt.
Asummary of our cash flows for 2006, 2005 and 2004 is pre-
sented below:
2006 2005 2004
(millions)
Cash and cash equivalents at beginning
of year $146 $361$126
Cash flows provided by (used in):
Operating activities 4,005 2,623 2,770
Investing activities (3,494) (3,360) (1,215)
Financing activities (515) 522 (1,320)
Net increase (decrease) in cash and
cash equivalents (4) (215) 235
Cash and cash equivalents at endof
year(1) $142 $146$361
(1) 2006 amount includes $4 million of cash classified as held for sale in our
Consolidated BalanceSheet.
Operating Cash Flows
In 2006, net cash provided by operating activities increased by
$1.4 billion as compared to 2005. The increase was primarily due
to an increase in cash earnings attributable to higher natural gas
and oil production, recovery of deferred fuel and purchased gas
costs and business interruption insurance proceeds, as well as
increased contributions from our merchant generation, non-
regulated retail energy marketing and gastransmission businesses.
The 2006 increase also reflects favorablechangesin working capi-
tal, mainly accounts receivable and inventories. We believe that
our operations provide astable source of cash flow sufficient to
contribute to planned levels of capital expenditures and maintain
or grow the dividend on common shares. However, our oper-
ations are subject torisks and uncertainties that maynegatively
impact the timing or amounts of operatingcash flows which are
discussed in Risk Factors.Thedeclaration andpayment of divi-
dends are subject tothediscretion of our BoardofDirectors and
will dependupon our results of operations, financial condition,
capital requirements and future prospects.
CREDIT RISK
Our exposuretopotential concentrations of credit risk results
primarily from our energy marketing and price risk management
activities and sales of gasand oil production. Presented below is a
summary of our gross credit exposure as of December 31, 2006
forthese activities. Our gross credit exposure foreach counter-
party is calculated as outstanding receivables plus any unrealized
on or off-balance sheet exposure, taking into account contractual
netting rights. Gross credit exposure is calculated prior to the
application of collateral.
Gross
Credit
Exposure
Credit
Collateral
Net
Credit
Exposure
(millions)
Investment grade(1) $855$28$827
Non-investment grade(2) 57 2 55
No external ratings:
Internally rated—investment grade(3) 280 5 275
Internally rated—non-investment
grade(4) 171 —171
Total $1,363 $35 $1,328
(1) Designations as investment grade are based upon minimum credit ratings
assigned by Moody’s Investors Service (Moody’s) and Standard &Poor’s Rat-
ings Services (Standard &Poor’s). The five largest counterparty exposures,
combined, for this category represented approximately 21% of the total net
credit exposure.
(2) The five largest counterparty exposures, combined, for this category repre-
sented approximately 2% of the total net credit exposure.
(3) The five largest counterparty exposures, combined, for this category repre-
sented approximately 13% of the total net credit exposure.
(4) The five largest counterparty exposures, combined, for this category repre-
sented approximately 3% of the total net credit exposure.
Investing Cash Flows
Significant cash flows used in investing activities for2006
included:
$2.1 billion of capital expenditures for the purchase and devel-
opment of gas and oil producing properties, drillingand
equipment costsandundeveloped lease acquisitions;
$2.0 billion of capital expenditures, including environmental
upgrades, routine capital improvements, construction of gen-
eration facilities, purchaseof nuclear fuel and construction and
improvements of gas and electric transmission and distribution
assets;
$1.1 billion forpurchases of securities held as investments in
our nuclear decommissioning trusts;and
$91 million related to the acquisition of Pablo Energy LLC,
which holds producing and other properties in the Texas
Panhandle area, net of cash acquired.
Cash flows used in investing activities for2006 were partially
offset by:
$1.0 billion of proceeds from the sales of securities held as
investments in our nuclear decommissioning trusts;
$393 million of proceeds from sales of gasand oil properties,
primarily resulting from the fourth quarter sale of certain
properties located in Texas and New Mexico;
$150 million of proceeds received from the sale or disposal of
certain assets; and
$76 million of proceeds from sales of emissions allowances
held for consumption.
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 in CreditRatings,our
ability to borrow fundsor 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
44 DOMINION2006 Annual Report