Dominion Power 2007 Annual Report Download - page 46

Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
A summary of our cash flows is presented below:
2007 2006 2005
(millions)
Cash and cash equivalents at
beginning of year $ 142 $ 146 $ 361
Cash flows provided by (used in):
Operating activities (246) 4,005 2,623
Investing activities 10,192 (3,494) (3,360)
Financing activities (9,801) (515) 522
Net increase (decrease) in cash and
cash equivalents 145 (4) (215)
Cash and cash equivalents at end of
year(1) $ 287 $ 142 $ 146
(1) 2007 and 2006 amounts include $4 million of cash classified as held for
sale in our Consolidated Balance Sheets.
Operating Cash Flows
In 2007, net cash provided by operating activities decreased by
$4.3 billion as compared to 2006. The decrease primarily reflects
income taxes paid on the gain from the sale of a majority of our
E&P business, as well as other cash costs associated with the sale,
such as gas and oil derivative settlement costs. In addition, cash
flow was lower in 2007 as it included only a partial year of cash
flow from the E&P operations sold. While taxes and other costs
of the sale are reflected in cash flow from operations, the gross
proceeds from the sale are reported in cash flow from investing
activities.
Our operations are subject to risks and uncertainties that may
negatively impact the timing or amounts of operating cash flows
which are discussed in Risk Factors.
C REDIT R ISK
Our exposure to potential concentrations of credit risk results
primarily from our energy marketing and price risk management
activities. Presented below is a summary of our credit exposure as
of December 31, 2007 for these activities. Our gross credit
exposure for each counterparty is calculated as outstanding receiv-
ables plus any unrealized on or off-balance sheet exposure, taking
into account contractual netting rights.
Gross
Credit
Exposure
Credit
Collateral
Net
Credit
Exposure
(millions)
Investment grade(1) $596 $ 98 $498
Non-investment grade(2) 13 — 13
No external ratings:
Internally rated—investment grade(3) 173 5 168
Internally rated—non-investment
grade(4) 26 — 26
Total $808 $103 $705
(1) Designations as investment grade are based upon minimum credit rat-
ings assigned by Moody’s Investors Service (Moody’s) and Standard &
Poor’s Ratings Services, a division of the McGraw-Hill Companies, Inc.
(Standard & Poor’s). The five largest counterparty exposures, combined,
for this category represented approximately 32% 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 16% of the total net credit exposure.
(4) The five largest counterparty exposures, combined, for this category repre-
sented approximately 1% of the total net credit exposure.
Investing Cash Flows
In 2007, net cash provided by investing activities was $10.2 bil-
lion as compared to net cash used in investing activities of $3.5
billion in 2006. This change primarily reflects proceeds received
in 2007 from the sale of a majority of our E&P business.
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 Credit Ratings, our
ability to borrow funds or 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
to certain regulatory approvals, including registration with the
SEC and, in the case of Virginia Electric and Power Company
(Virginia Power), approval by the Virginia State Corporation
Commission (Virginia Commission).
In December 2005, the SEC adopted the rules that currently
govern the registration, communications and offering processes
under the Securities Act of 1933. The rules provide for a stream-
lined shelf registration process to provide registrants with timely
access to capital. Under these rules, Dominion and Virginia
Power meet the definition of a well-known seasoned issuer. This
allows the companies to use an automatic shelf registration state-
ment to register any offering of securities, other than those for
business combination transactions.
In 2007, net cash used in financing activities increased by
$9.3 billion as compared to 2006. The increase primarily reflects
the use of proceeds from the sale of a majority of our E&P busi-
ness to repurchase our common stock and repay debt.
C
REDIT F ACILITIES A ND S HORT -T ERM D EBT
As a result of the merger of CNG with Dominion in June 2007,
all of CNG’s former credit facilities have been assumed by
Dominion. We use short-term debt, primarily commercial paper,
to fund working capital requirements, as a bridge to long-term
debt financing and as bridge financing for acquisitions, if appli-
cable. The levels of borrowing may vary significantly during the
course of the year, depending upon the timing and amount of
cash requirements not satisfied by cash from operations. In addi-
tion, we utilize cash and letters of credit to fund collateral
requirements under our commodities hedging program. Collateral
requirements are impacted by commodity prices, hedging levels,
our credit quality and the credit quality of our counterparties.
Short-term financing is supported by a $3.0 billion five-year joint
revolving credit facility with Virginia Power dated February 2006
that terminates in February 2011, and can also be used to support
up to $1.5 billion of letters of credit. Short-term financing at
Dominion is also supported by an amended and restated $1.7
billion five-year revolving credit facility and a $200 million five-
year bilateral credit facility, dated February 2006 and December
2005, respectively, and are scheduled to terminate in August and
December 2010, respectively. At December 31, 2007, we had
committed lines of credit totaling $4.9 billion. These lines of
credit support commercial paper borrowings, bank loans and let-
ter of credit issuances. Our financial policy precludes issuing
commercial paper in excess of our supporting lines of credit. At
44 Dominion 2007 Annual Report