Dominion Power 2006 Annual Report Download - page 98

Authorize an enhanced ROE as afinancial incentive forcon-
struction of majorbaseload generation projects and for renew-
able energy portfolio standard programs.
The bills would also continue statutory provisions directing us
to file annual fuel cost recovery cases with theVirginia Commis-
sion beginning in 2007 and continuing thereafter.However, our
fuel factor increase as of July 1, 2007 would be limitedtoan
amount that resultsinresidential customers not receiving an
increase of more than 4% of total rates as of that date, and the
remainder would be deferred and collected over three years, as
follows:
in calendaryear 2008, the deferral portion collected is limited
to an amount that resultsinresidential customers not receiv-
ing an increase of more than 4% of total rates as of January 1,
2008;
in calendaryear 2009, the deferral portion collected is limited
to an amount that resultsinresidential customers not receiv-
ing an increase of more than 4% of total rates as of January 1,
2009; and
the remainder of the deferral balance, if any, would be col-
lected in the fuelfactor in calendar year 2010.
The Governor has until March 26, 2007 to sign, propose
amendments to,or veto the bills. With theGovernor’s signature,
the bills would become laweffectiveJuly 1, 2007. At this time,
we cannot predict the outcome of these legislative proposals.
NOTE 24. FAIR VALUE OF FINANCIAL
INSTRUMENTS
Substantially all of our financial instruments are recorded at fair
value, with the exception of the instruments described below that
are reported at historical cost. Fair values have been determined
using available market information andvaluationmethodologies
considered appropriate by management. The financial
instruments’ carrying amounts and fair values are as follows:
At December 31, 2006 2005
Carrying
Amount
Estimated
Fair
Value(1)
Carrying
Amount
Estimated
Fair
Value(1)
(millions)
Long-term debt(2) $15,320 $15,576 $15,567 $15,928
Junior subordinated notes
payable to:
Affiliates 1,151 1,209 1,416 1,537
Other 798 828 ——
(1) Fair value is estimated using market prices, where available, and interest rates
currently available for issuance of debt with similar terms and remaining
maturities. The carrying amount of debt issues with short-term maturities and
variable ratesrefinanced at current market rates is areasonable estimate of
their fair value.
(2) Includes securities due within one year.
NOTE 25. CREDIT RISK
Creditriskis our risk of financial loss if counterparties fail to
perform their contractualobligations. In order to minimize over-
all credit risk, we maintain credit policies, including the evalua-
tion of counterparty financial condition, collateral requirements
and the use of standardized agreements that facilitate the netting
of cash flows associated with asingle counterparty. In addition,
counterparties maymake available collateral, including letters of
credit or cash held as margin deposits, as aresult of exceeding
agreed-upon credit limits, or mayberequired to prepay the trans-
action.
We maintain aprovision for credit losses based on factors
surrounding the credit risk of our customers, historical trends and
other information. We believe, based on our credit policies and
our December 31, 2006 provision for credit losses, that it is
unlikely that amaterial adverse effect on our financial position,
results of operations or cash flows would occur as aresult of coun-
terparty nonperformance.
As a diversified energy company,wetransact with major
companies in the energy industry andwith commercial and resi-
dential energy consumers. Except forour E&P business activities,
these transactions principally occur in the Northeast,
Mid-Atlanticand Midwest regions of the U.S. We do not believe
that this geographic concentration contributes significantly to our
overall exposure to credit risk. In addition, as aresult of our large
and diverse customer base, we are not exposed to a significant
concentration of credit risk forreceivables arising from electric
and gasutility operations, including transmission services and
retail energy sales.
Our exposuretocredit risk is concentrated primarily within
our sales of gasand oil productionandourenergy marketing and
risk management activities, as we transact with a smaller, less
diverse group of counterparties and transactions mayinvolve large
notionalvolumes and potentially volatile commodity prices.
Energy marketing and risk management activities include trading
of energy-related commodities, marketing of merchant generation
output, structured transactions and the use of financial contracts
forenterprise-wide hedging purposes. Our gross credit exposure
foreach counterparty is calculated as outstanding receivables plus
any unrealized on or off-balance sheet exposure, taking into
account contractual netting rights. Gross credit exposure is calcu-
lated prior to the application of collateral. At December 31, 2006,
our gross credit exposure totaled $1.36 billion. After the applica-
tion of collateral, our credit exposure is reduced to $1.33 billion.
Of this amount, investment grade counterparties represented
83% andno single counterparty exceeded 9%.
NOTE 26. EQUITY AND COST-METHOD
INVESTMENTS
Equity-Method Investments
At December 31, 2006 and 2005, our equity methodinvestments
totaled $289 million and$331 million, respectively, and equity
earnings on these investments totaled $37 million in 2006, $43
million in 2005 and $34 million in 2004. We received dividend
income from these investments of $21 million, $28 million and
$37 million in 2006, 2005 and 2004, respectively. Also during
2006, we sold two of our equity method investments, resulting in
anetloss of $3 million. Our equity method investments are
reported in our Consolidated Balance Sheets in other investments.
Equity earnings on these investments are reported in our Con-
solidated Statements of Income in other income.
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