Dominion Power 2007 Annual Report Download - page 107

N OTE 28. D OMINION C APITAL ,I NC .
Our Consolidated Balance Sheets reflect the following DCI assets:
At December 31, 2007 2006
(millions)
Current assets(1) $266 $229
Loans held for resale 323 —
Loans receivable, net 34 399
Available-for-sale securities —39
Other investments 72 81
Property, plant and equipment, net —10
Deferred charges and other assets 127 83
Total $822 $841
(1) Includes $30 million of loans held for resale in 2007. Includes $36 mil-
lion of loans receivable, net in 2006.
Securitizations of Financial Assets
At December 31, 2006, DCI held $39 million of retained inter-
ests from the securitization of financial assets, which were classi-
fied as available-for-sale securities. The retained interests resulted
from prior year securitizations of CDO and collateralized mort-
gage obligation (CMO) transactions. During 2007, DCI recog-
nized impairment losses of $27 million ($16 million after-tax)
due to changes in market valuations. DCI also sold three of the
residual trusts in the fourth quarter of 2007. DCI still owns six
residual trusts with no book basis.
We executed certain agreements in 2003 that resulted in the
sale of certain financial assets in exchange for an investment in the
subordinated notes of a third-party CDO entity. This investment
consisted of $100 million of Class B-1 Notes, 7.5% current pay
interest and $148 million of Class B-2 Notes, 3% paid-in-kind
(PIK) interest. The equity interest in the new CDO entity, a
voting interest entity, were held by an entity that is not affiliated
with us. The CDO entity’s primary focus is the purchase and
origination of middle market senior secured first and second lien
commercial and industrial loans in both the primary and secon-
dary loan markets.
Prior to June 2006, our intent was to rate and market the B-1
Notes and hold the B-2 Notes to maturity. DCI also had a
commitment to fund up to $15 million of liquidity to the CDO
entity, but this commitment has expired.
In 2006, we decided to pursue the sale of the B-2 Notes and
recorded an $85 million charge in other operations and main-
tenance expense reflecting an other-than-temporary decline in the
fair value of the B-2 Notes. An impairment was required because
of a further increase in interest rates, an increase in our credit risk
associated with the equity reduction discussed below and because
we no longer expected the fair value of the B-2 Notes to recover
prior to a sale. During 2007, we recorded a LOCOM adjustment
on the B-1 and B-2 notes of $54 million ($35 million after-tax)
due to a deterioration in value of the underlying collateral. DCI
will continue its efforts to sell the B-1 and B-2 notes in 2008.
DCI’s investments in the CDO entity were previously
included in available-for-sale securities in our Consolidated Bal-
ance Sheet. In 2006, the equity investor reduced its equity at risk
in the CDO entity, which required a redetermination of whether
the CDO entity is a VIE under FIN 46R. We concluded that the
CDO entity is a VIE and that DCI is the primary beneficiary of
the CDO entity, which we consolidate in accordance with FIN
46R. Due to its consolidation, we reflect the assets and liabilities
of the CDO entity in our Consolidated Balance Sheet. At
December 31, 2007 and 2006, the CDO entity had $460 million
and $385 million, respectively, of notes payable that mature in
January 2017 and are nonrecourse to us. The CDO entity held
the following assets that served as collateral for its obligations:
As of December 31, 2007 2006
(millions)
Other current assets(1) $257 $183
Loans held for resale 323 —
Loans receivable, net —367
Other investments 32 36
Total assets $612 $586
(1) Includes $30 million of loans held for resale in 2007. Includes $36 mil-
lion of loans receivable, net in 2006.
There were no mortgage securitizations in 2006 or 2007.
Activity for the subordinated notes related to the CDO entity,
retained interests from securitizations of CMOs and CDO
retained interests is summarized as follows:
CMO
Retained Interests
—CDO(1)
(millions)
Balance at January 1, 2006 $ 38 $ 255
Interest income —12
Consolidation of CDO — (171)
Cash received (1) (11)
Fair value adjustment 2 (85)
Balance at December 31, 2006 $39 $ —
Cash received (10) —
Fair value adjustment (29)(2) —
Balance at December 31, 2007 $— $ —
(1) Includes interest receivable.
(2) Includes the reversal of an unrealized gain of $2 million recorded in
2006, plus a $27 million impairment loss due to the write-down of the
CMOs.
Loans Related to the CDO Entity
Presented below are the significant accounting policies associated
with loans held for resale reflected on our Consolidated Balance
Sheet due to consolidation of the CDO entity.
L
OANS H ELD FOR R ESALE
We report loans held for resale at LOCOM. We determine any
LOCOM adjustment to the loans held for sale on a pool basis by
aggregating those loans based on similar risks and characteristics.
The fair value of the loans are calculated by discounting sched-
uled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk
inherent in the loan, current economic conditions, and lending
conditions. The estimates of maturity are based on historical
experience with repayments for each loan classification.
A loan is considered non-performing if it meets the definition
of either a (i) Defaulted Security, or (ii) PIK Security, where
interest has been deferred or paid-in-kind for three months (or 6
months in the case of a security that is only required to pay inter-
est on a quarterly basis).
‰In general, a Defaulted Security is: 1) a loan where a default as
to the payment of principal and/or interest has occurred and
is continuing, 2) a loan that has a Standard & Poor’s rating of
“D” or “SD” or has a Moody’s rating of “Ca” or lower; or,
Dominion 2007 Annual Report 105