Dominion Power 2007 Annual Report Download - page 106

Notes to Consolidated Financial Statements, Continued
believe that the final resolution of this matter will have a material
adverse effect on our results of operations or financial condition.
N OTE 25. F AIR V ALUE OF F INANCIAL
I NSTRUMENTS
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 and valuation methodologies
considered appropriate by management. The financial
instruments’ carrying amounts and fair values are as follows:
At December 31, 2007 2006
Carrying
Amount
Estimated
Fair
Value(1)
Carrying
Amount
Estimated
Fair
Value(1)
(millions)
Long-term debt(2) $13,236 $13,377 $15,320 $15,576
Junior subordinated notes
payable to:
Affiliates 678 681 1,151 1,209
Other 798 804 798 828
(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 rates refinanced at current market rates is a
reasonable estimate of their fair value.
(2) Includes securities due within one year and amounts which represent the
valuation of certain fair value hedges associated with our fixed-rate debt.
N OTE 26. C REDIT R ISK
Credit risk is our risk of financial loss if counterparties fail to
perform their contractual obligations. 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 a single counterparty. In addition,
counterparties may make available collateral, including letters of
credit or cash held as margin deposits, as a result of exceeding
agreed-upon credit limits, or may be required to prepay the
transaction.
We maintain a provision 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, 2007 provision for credit losses, that it is
unlikely that a material adverse effect on our financial position,
results of operations or cash flows would occur as a result of coun-
terparty nonperformance.
As a diversified energy company, we transact with major
companies in the energy industry and with commercial and resi-
dential energy consumers. These transactions principally occur in
the Northeast, mid-Atlantic and Midwest regions of the U.S. We
do not believe that this geographic concentration contributes sig-
nificantly to our overall exposure to credit risk. In addition, as a
result of our large and diverse customer base, we are not exposed
to a significant concentration of credit risk for receivables arising
from electric and gas utility operations, including transmission
services and retail energy sales.
Our exposure to credit risk is concentrated primarily within
our energy marketing and price risk management activities, as we
transact with a smaller, less diverse group of counterparties and
transactions may involve large notional volumes and potentially
volatile commodity prices. Energy marketing and price risk
management activities include trading of energy-related commod-
ities, marketing of merchant generation output, structured trans-
actions and the use of financial contracts for enterprise-wide
hedging purposes. Gross credit exposure for each counterparty is
calculated as outstanding receivables plus any unrealized on or
off-balance sheet exposure, taking into account contractual net-
ting rights. Gross credit exposure is calculated prior to the
application of collateral. At December 31, 2007, our gross credit
exposure totaled $808 million. After the application of collateral,
our credit exposure is reduced to $705 million. Of this amount,
investment grade counterparties, including those internally rated,
represented 94% and no single counterparty exceeded 12%.
N OTE 27. E QUITY AND C OST -M ETHOD
I NVESTMENTS
Equity-Method Investments
At December 31, 2007 and 2006, our equity method investments
totaled $331 million and $289 million, respectively, and equity
earnings on these investments totaled $35 million in 2007, $37
million in 2006 and $43 million in 2005. We received dividend
income from these investments of $16 million, $21 million and
$28 million in 2007, 2006 and 2005, respectively. During 2007,
we recognized an impairment loss of $11 million in connection
with the expected sale of one of our equity method investments.
During 2006, we sold two of our equity method investments,
resulting in a net loss of $3 million. Our equity method invest-
ments are reported in our Consolidated Balance Sheets in other
investments. Equity earnings on these investments are reported in
other income in our Consolidated Statements of Income.
Cost-Method Investments
At December 31, 2007 and 2006, the carrying value of our cost-
method investments totaled $34 million and $37 million,
respectively. Our cost method investments are reported in our
Consolidated Balance Sheets in other investments. In 2007 and
2006, we reviewed all of our cost method investments for evi-
dence of adverse changes in fair value; however, we did not esti-
mate the fair value of our cost-method investments unless we
identified events or changes in circumstances that had a sig-
nificant adverse effect on the fair value of the investments.
104 Dominion 2007 Annual Report