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Dominion Resources 10-Q 2012
FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

 

 

 

Commission File

Number

  

Exact name of registrants as specified in their charters, address of

principal executive offices and registrants’ telephone number

  

I.R.S. Employer

Identification Number

001-08489    DOMINION RESOURCES, INC.    54-1229715
001-02255    VIRGINIA ELECTRIC AND POWER COMPANY    54-0418825
  

120 Tredegar Street

Richmond, Virginia 23219

(804) 819-2000

  

State or other jurisdiction of incorporation or organization of the registrants: Virginia

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Dominion Resources, Inc.    Yes  x    No  ¨             Virginia Electric and Power Company    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Dominion Resources, Inc.    Yes  x    No  ¨             Virginia Electric and Power Company    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Dominion Resources, Inc.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Virginia Electric and Power Company

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Dominion Resources, Inc.    Yes  ¨    No  x             Virginia Electric and Power Company    Yes  ¨    No  x

At March 31, 2012, the latest practicable date for determination, Dominion Resources, Inc. had 571,498,534 shares of common stock outstanding and Virginia Electric and Power Company had 274,723 shares of common stock outstanding. Dominion Resources, Inc. is the sole holder of Virginia Electric and Power Company’s common stock.

This combined Form 10-Q represents separate filings by Dominion Resources, Inc. and Virginia Electric and Power Company. Information contained herein relating to an individual registrant is filed by that registrant on its own behalf. Virginia Electric and Power Company makes no representations as to the information relating to Dominion Resources, Inc.’s other operations.

 

 

 


Table of Contents

COMBINED INDEX

 

         Page
Number
 
  Glossary of Terms      PAGE 3   
  PART I. Financial Information   

Item 1.

  Financial Statements      PAGE 6   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      PAGE 49   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      PAGE 63   

Item 4.

  Controls and Procedures      PAGE 64   
  PART II. Other Information   

Item 1.

  Legal Proceedings      PAGE 64   

Item 1A.

  Risk Factors      PAGE 65   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      PAGE 65   

Item 6.

  Exhibits      PAGE 66   

 

PAGE 2


Table of Contents

GLOSSARY OF TERMS

The following abbreviations or acronyms used in this Form 10-Q are defined below:

 

Abbreviation or Acronym

  

Definition

2009 Base Rate Review

  

Order entered by the Virginia Commission in January 2009, pursuant to the Regulation Act, initiating reviews of the base rates and terms and conditions of all investor-owned utilities in Virginia

AFUDC

  

Allowance for funds used during construction

AOCI

  

Accumulated other comprehensive income (loss)

ARO

  

Asset retirement obligation

ARP

  

Acid Rain Program, a market-based initiative for emissions allowance trading, established pursuant to Title IV of the CAA

bcf

  

Billion cubic feet

Bear Garden

  

A 590 MW combined cycle, natural gas-fired power station in Buckingham County, Virginia

Biennial Review Order

  

Order issued by the Virginia Commission in November 2011 concluding the 2009 - 2010 biennial review of Virginia Power’s base rates, terms and conditions

Brayton Point

  

Brayton Point power station

CAA

  

Clean Air Act

CAIR

  

Clean Air Interstate Rule

CEO

  

Chief Executive Officer

CERCLA

  

Comprehensive Environmental Response, Compensation and Liability Act of 1980

CFO

  

Chief Financial Officer

CFTC

  

Commodity Futures Trading Commission

CO2

  

Carbon dioxide

Companies

  

Dominion and Virginia Power, collectively

Cooling degree days

  

Units measuring the extent to which the average daily temperature is greater than 65 degrees Fahrenheit, calculated as the difference between 65 degrees and the average temperature for that day

Cove Point

  

Dominion Cove Point LNG, LP

CSAPR

  

Cross State Air Pollution Rule

CWA

  

Clean Water Act

DEI

  

Dominion Energy, Inc.

Dodd-Frank Act

  

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

DOE

  

Department of Energy

Dominion

  

The legal entity, Dominion Resources, Inc., one or more of Dominion Resources, Inc.’s consolidated subsidiaries (other than Virginia Power) or operating segments or the entirety of Dominion Resources, Inc. and its consolidated subsidiaries

DRS

  

Dominion Resources Services, Inc.

Dth

  

Dekatherm

DVP

  

Dominion Virginia Power operating segment

East Ohio

  

The East Ohio Gas Company, doing business as Dominion East Ohio

EPA

  

Environmental Protection Agency

EPS

  

Earnings per share

ERM

  

Enterprise Risk Management

Fairless

  

Fairless power station

FCM

  

Futures Commission Merchant

FERC

  

Federal Energy Regulatory Commission

Fowler Ridge

  

A wind-turbine facility joint venture between Dominion and BP Alternative Energy, Inc. in Benton County, Indiana

FTRs

  

Financial transmission rights

GAAP

  

U.S. generally accepted accounting principles

Gal

  

Gallon

GHG

  

Greenhouse gas

 

PAGE 3


Table of Contents

Abbreviation or Acronym

  

Definition

Heating degree days

  

Units measuring the extent to which the average daily temperature is less than 65 degrees Fahrenheit, calculated as the difference between 65 degrees and the average temperature for that day

INPO

  

Institute of Nuclear Power Operations

ISO

  

Independent system operator

Kewaunee

  

Kewaunee nuclear power station

Kincaid

  

Kincaid power station

LNG

  

Liquefied natural gas

Manchester Street

  

Manchester Street power station

MATS

  

Utility Mercury and Air Toxics Standard Rule

MD&A

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

MF Global

  

MF Global Inc.

Millstone

  

Millstone nuclear power station

Moody’s

  

Moody’s Investors Service

MW

  

Megawatt

MWh

  

Megawatt hour

NCEMC

  

North Carolina Electric Membership Corporation

NedPower

  

A wind-turbine facility joint venture between Dominion and Shell WindEnergy Inc. in Grant County, West Virginia

NGLs

  

Natural gas liquids

North Anna

  

North Anna nuclear power station

North Carolina Commission

  

North Carolina Utilities Commission

NOx

  

Nitrogen oxide

NPDES

  

National Pollutant Discharge Elimination System

NRC

  

Nuclear Regulatory Commission

NSPS

  

New Source Performance Standards

ODEC

  

Old Dominion Electric Cooperative

Ohio Commission

  

Public Utilities Commission of Ohio

OPEB

  

Other Postretirement Employee Benefits

PIR

  

Pipeline Infrastructure Replacement program deployed by East Ohio

PJM

  

PJM Interconnection, LLC

RCC

  

Replacement Capital Covenants

Regulation Act

  

Legislation effective July 1, 2007, that amended the Virginia Electric Utility Restructuring Act and fuel factor statute, which legislation is also known as the Virginia Electric Utility Regulation Act

RGGI

  

Regional Greenhouse Gas Initiative

Rider B

  

A rate adjustment clause associated with the recovery of costs related to the proposed conversion of three of Virginia Power’s coal-fired power stations to biomass

Rider R

  

A rate adjustment clause associated with the recovery of costs related to Bear Garden

Rider S

  

A rate adjustment clause associated with the recovery of costs related to the Virginia City Hybrid Energy Center

ROE

  

Return on equity

RPS

  

Renewable Portfolio Standard

RTO

  

Regional transmission organization

Salem Harbor

  

Salem Harbor power station

SEC

  

Securities and Exchange Commission

September 2006 hybrids

  

2006 Series B Enhanced Junior Subordinated Notes due 2066

SO2

  

Sulfur dioxide

Standard & Poor’s

  

Standard & Poor’s Ratings Services, a division of the McGraw-Hill Companies, Inc.

State Line

  

State Line power station

 

PAGE 4


Table of Contents

Abbreviation or Acronym

  

Definition

U.S.

  

United States of America

UAO

  

Unilateral Administrative Order

VIE

  

Variable interest entity

Virginia City Hybrid Energy Center

  

A 585 MW baseload carbon-capture compatible, clean coal powered electric generation facility under construction in Wise County, Virginia

Virginia Commission

  

Virginia State Corporation Commission

Virginia Power

  

The legal entity, Virginia Electric and Power Company, one or more of its consolidated subsidiaries or operating segments or the entirety of Virginia Power and its consolidated subsidiaries

Virginia Settlement Approval Order

  

Order issued by the Virginia Commission in March 2010 concluding Virginia Power’s 2009 Base Rate Review

 

PAGE 5


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DOMINION RESOURCES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months Ended
March 31,
 
     2012      2011  
(millions, except per share amounts)              

Operating Revenue

   $ 3,492       $ 4,057   
  

 

 

    

 

 

 

Operating Expenses

     

Electric fuel and other energy-related purchases

     948         1,049   

Purchased electric capacity

     113         119   

Purchased gas

     412         642   

Other operations and maintenance

     647         861   

Depreciation, depletion and amortization

     287         262   

Other taxes

     170         161   
  

 

 

    

 

 

 

Total operating expenses

     2,577         3,094   
  

 

 

    

 

 

 

Income from operations

     915         963   
  

 

 

    

 

 

 

Other income

     74         57   

Interest and related charges

     228         227   
  

 

 

    

 

 

 

Income from operations including noncontrolling interests before income tax expense

     761         793   

Income tax expense

     260         310   
  

 

 

    

 

 

 

Net Income Including Noncontrolling Interests

     501         483   

Noncontrolling Interests

     7         4   
  

 

 

    

 

 

 

Net Income Attributable to Dominion

   $ 494       $ 479   
  

 

 

    

 

 

 

Amounts Attributable to Dominion:

     

Earnings Per Common Share – Basic

   $ 0.87       $ 0.83   
  

 

 

    

 

 

 

Earnings Per Common Share – Diluted

   $ 0.86       $ 0.82   
  

 

 

    

 

 

 

Dividends declared per common share

   $ 0.5275       $ 0.4925   
  

 

 

    

 

 

 

The accompanying notes are an integral part of Dominion’s Consolidated Financial Statements.

 

PAGE 6


Table of Contents

DOMINION RESOURCES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended
March 31,
 
     2012     2011  
(millions)             

Net income including noncontrolling interests

   $ 501      $ 483   

Other comprehensive income (loss), net of taxes:

    

Net deferred gains (losses) on derivatives-hedging activities, net of $(80) and $58 tax

     128        (85

Changes in unrealized net gains on investment securities, net of $(56) and $(25) tax

     85        38   

Changes in net unrecognized pension and other postretirement benefit costs, net of $— and $(15) tax

     —          25   

Amounts reclassified to net income:

    

Net derivative (gains) losses-hedging activities, net of $12 and $(5) tax

     (16     13   

Net realized gains on investment securities, net of $6 and $2 tax

     (10     (2

Net pension and other postretirement benefit costs, net of $(9) and $(2) tax

     12        14   
  

 

 

   

 

 

 

Total other comprehensive income

     199        3   
  

 

 

   

 

 

 

Comprehensive income including noncontrolling interests

     700        486   

Comprehensive income attributable to noncontrolling interests

     7        4   
  

 

 

   

 

 

 

Comprehensive income attributable to Dominion

   $ 693      $ 482   
  

 

 

   

 

 

 

The accompanying notes are an integral part of Dominion’s Consolidated Financial Statements.

 

PAGE 7


Table of Contents

DOMINION RESOURCES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     March 31,
2012
    December  31,
2011(1)
 
(millions)             

ASSETS

    

Current Assets

    

Cash and cash equivalents

   $ 133      $ 102   

Customer receivables (less allowance for doubtful accounts of $29 at both dates)

     1,539        1,780   

Other receivables (less allowance for doubtful accounts of $5 and $8)

     173        255   

Inventories

     1,249        1,348   

Derivative assets

     822        705   

Other

     1,103        1,240   
  

 

 

   

 

 

 

Total current assets

     5,019        5,430   
  

 

 

   

 

 

 

Investments

    

Nuclear decommissioning trust funds

     3,231        2,999   

Investment in equity method affiliates

     552        553   

Restricted cash equivalents

     104        141   

Other

     296        292   
  

 

 

   

 

 

 

Total investments

     4,183        3,985   
  

 

 

   

 

 

 

Property, Plant and Equipment

    

Property, plant and equipment

     42,895        42,033   

Property, plant and equipment, VIE

     957        957   

Accumulated depreciation, depletion and amortization

     (13,564     (13,320
  

 

 

   

 

 

 

Total property, plant and equipment, net

     30,288        29,670   
  

 

 

   

 

 

 

Deferred Charges and Other Assets

    

Goodwill

     3,141        3,141   

Regulatory assets

     1,319        1,382   

Other

     2,143        2,006   
  

 

 

   

 

 

 

Total deferred charges and other assets

     6,603        6,529   
  

 

 

   

 

 

 

Total assets

   $ 46,093      $ 45,614   
  

 

 

   

 

 

 

 

(1) Dominion’s Consolidated Balance Sheet at December 31, 2011 has been derived from the audited Consolidated Financial Statements at that date.

The accompanying notes are an integral part of Dominion’s Consolidated Financial Statements.

 

PAGE 8


Table of Contents

DOMINION RESOURCES, INC.

CONSOLIDATED BALANCE SHEETS—(Continued)

(Unaudited)

 

     March 31,
2012
    December  31,
2011(1)
 
(millions)             

LIABILITIES AND EQUITY

    

Current Liabilities

    

Securities due within one year

   $ 2,131      $ 1,479   

Short-term debt

     1,057        1,814   

Accounts payable

     935        1,250   

Derivative liabilities

     871        951   

Other

     1,660        1,468   
  

 

 

   

 

 

 

Total current liabilities

     6,654        6,962   
  

 

 

   

 

 

 

Long-Term Debt

    

Long-term debt

     14,564        14,785   

Long-term debt, VIE

     882        890   

Junior subordinated notes payable to affiliates

     268        268   

Enhanced junior subordinated notes

     1,365        1,451   
  

 

 

   

 

 

 

Total long-term debt

     17,079        17,394   
  

 

 

   

 

 

 

Deferred Credits and Other Liabilities

    

Deferred income taxes and investment tax credits

     5,719        5,216   

Asset retirement obligations

     1,396        1,383   

Regulatory liabilities

     1,423        1,324   

Other

     1,596        1,575   
  

 

 

   

 

 

 

Total deferred credits and other liabilities

     10,134        9,498   
  

 

 

   

 

 

 

Total liabilities

     33,867        33,854   
  

 

 

   

 

 

 

Commitments and Contingencies (see Note 12)

    
  

 

 

   

 

 

 

Subsidiary Preferred Stock Not Subject to Mandatory Redemption

     257        257   
  

 

 

   

 

 

 

Equity

    

Common stock – no par(2)

     5,256        5,180   

Other paid-in capital

     173        179   

Retained earnings

     6,891        6,697   

Accumulated other comprehensive loss

     (411     (610
  

 

 

   

 

 

 

Total common shareholders’ equity

     11,909        11,446   
  

 

 

   

 

 

 

Noncontrolling interest

     60        57   
  

 

 

   

 

 

 

Total equity

     11,969        11,503   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 46,093      $ 45,614   
  

 

 

   

 

 

 

 

(1) Dominion’s Consolidated Balance Sheet at December 31, 2011 has been derived from the audited Consolidated Financial Statements at that date.
(2) 1 billion shares authorized; 571 million shares and 570 million shares outstanding at March 31, 2012 and December 31, 2011, respectively.

The accompanying notes are an integral part of Dominion’s Consolidated Financial Statements.

 

PAGE 9


Table of Contents

DOMINION RESOURCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

Three Months Ended March 31,

   2012     2011  
(millions)             

Operating Activities

    

Net income including noncontrolling interests

   $ 501      $ 483   

Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:

    

Depreciation, depletion and amortization (including nuclear fuel)

     353        318   

Deferred income taxes and investment tax credits

     269        227   

Rate refunds

     (55     (29

Other adjustments

     (72     (17

Changes in:

    

Accounts receivable

     327        292   

Inventories

     99        119   

Deferred fuel and purchased gas costs, net

     162        (50

Prepayments

     37        54   

Accounts payable

     (275     (299

Accrued interest, payroll and taxes

     89        (129

Margin deposit assets and liabilities

     97        (120

Other operating assets and liabilities

     91        63   
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,623        912   
  

 

 

   

 

 

 

Investing Activities

    

Plant construction and other property additions (including nuclear fuel)

     (981     (806

Proceeds from sales of securities

     415        502   

Purchases of securities

     (420     (522

Restricted cash equivalents

     37        56   

Other

     3        18   
  

 

 

   

 

 

 

Net cash used in investing activities

     (946     (752
  

 

 

   

 

 

 

Financing Activities

    

Repayment of short-term debt, net

     (757     (538

Issuance and remarketing of long-term debt

     450        1,060   

Repayment and repurchase of long-term debt

     (104     (2

Issuance of common stock

     69        17   

Repurchase of common stock

     —          (274

Common dividend payments

     (301     (285

Subsidiary preferred dividend payments

     (4     (4

Other

     1        (8
  

 

 

   

 

 

 

Net cash used in financing activities

     (646     (34
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     31        126   

Cash and cash equivalents at beginning of period

     102        62   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 133      $ 188   
  

 

 

   

 

 

 

Supplemental Cash Flow Information

    

Significant noncash investing activities:

    

Accrued capital expenditures

   $ 298      $ 167   
  

 

 

   

 

 

 

The accompanying notes are an integral part of Dominion’s Consolidated Financial Statements.

 

PAGE 10


Table of Contents

VIRGINIA ELECTRIC AND POWER COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months Ended
March 31,
 
     2012      2011  
(millions)              

Operating Revenue

   $ 1,754       $ 1,757   
  

 

 

    

 

 

 

Operating Expenses

     

Electric fuel and other energy-related purchases

     614         593   

Purchased electric capacity

     113         118   

Other operations and maintenance:

     

Affiliated suppliers

     83         73   

Other

     223         229   

Depreciation and amortization

     188         174   

Other taxes

     65         59   
  

 

 

    

 

 

 

Total operating expenses

     1,286         1,246   
  

 

 

    

 

 

 

Income from operations

     468         511   
  

 

 

    

 

 

 

Other income

     23         29   

Interest and related charges

     100         92   
  

 

 

    

 

 

 

Income before income tax expense

     391         448   

Income tax expense

     148         170   
  

 

 

    

 

 

 

Net Income

     243         278   

Preferred dividends

     4         4   
  

 

 

    

 

 

 

Balance available for common stock

   $ 239       $ 274   
  

 

 

    

 

 

 

The accompanying notes are an integral part of Virginia Power’s Consolidated Financial Statements.

 

PAGE 11


Table of Contents

VIRGINIA ELECTRIC AND POWER COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended
March 31,
 
     2012     2011  
(millions)             

Net income

   $ 243      $ 278   

Other comprehensive income (loss), net of taxes:

    

Net deferred losses on derivatives-hedging activities, net of $— tax at both dates

     (1     —     

Changes in unrealized net gains on nuclear decommissioning trust funds, net of $(5) and $(2) tax

     9        3   

Amounts reclassified to net income:

    

Net derivative (gains) losses-hedging activities, net of $(1) and $— tax

     1        (1

Net realized gains on nuclear decommissioning trust funds, net of $1 and $— tax

     (1     —     
  

 

 

   

 

 

 

Other comprehensive income

     8        2   
  

 

 

   

 

 

 

Comprehensive income

   $ 251      $ 280   
  

 

 

   

 

 

 

The accompanying notes are an integral part of Virginia Power’s Consolidated Financial Statements.

 

PAGE 12


Table of Contents

VIRGINIA ELECTRIC AND POWER COMPANY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     March 31,
2012
    December 31,
2011(1)
 
(millions)             

ASSETS

    

Current Assets

    

Cash and cash equivalents

   $ 28      $ 29   

Customer receivables (less allowance for doubtful accounts of $11 at both dates)

     789        892   

Other receivables (less allowance for doubtful accounts of $4 and $7)

     127        145   

Inventories (average cost method)

     777        797   

Prepayments

     29        41   

Other

     373        532   
  

 

 

   

 

 

 

Total current assets

     2,123        2,436   
  

 

 

   

 

 

 

Investments

    

Nuclear decommissioning trust funds

     1,467        1,370   

Other

     32        36   
  

 

 

   

 

 

 

Total investments

     1,499        1,406   
  

 

 

   

 

 

 

Property, Plant and Equipment

    

Property, plant and equipment

     29,136        28,626   

Accumulated depreciation and amortization

     (9,758     (9,615
  

 

 

   

 

 

 

Total property, plant and equipment, net

     19,378        19,011   
  

 

 

   

 

 

 

Deferred Charges and Other Assets

    

Intangible assets

     185        183   

Regulatory assets

     345        399   

Other

     86        109   
  

 

 

   

 

 

 

Total deferred charges and other assets

     616        691   
  

 

 

   

 

 

 

Total assets

   $ 23,616      $ 23,544   
  

 

 

   

 

 

 

 

(1) Virginia Power’s Consolidated Balance Sheet at December 31, 2011 has been derived from the audited Consolidated Financial Statements at that date.

The accompanying notes are an integral part of Virginia Power’s Consolidated Financial Statements.

 

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VIRGINIA ELECTRIC AND POWER COMPANY

CONSOLIDATED BALANCE SHEETS—(Continued)

(Unaudited)

 

     March 31,
2012
     December  31,
2011(1)
 
(millions)              

LIABILITIES AND SHAREHOLDER’S EQUITY

     

Current Liabilities

     

Securities due within one year

   $ 1,016       $ 616   

Short-term debt

     255         894   

Accounts payable

     395         405   

Payables to affiliates

     54         108   

Affiliated current borrowings

     187         187   

Accrued interest, payroll and taxes

     363         226   

Other

     520         685   
  

 

 

    

 

 

 

Total current liabilities

     2,790         3,121   
  

 

 

    

 

 

 

Long-Term Debt

     6,292         6,246   
  

 

 

    

 

 

 

Deferred Credits and Other Liabilities

     

Deferred income taxes and investment tax credits

     3,339         3,180   

Asset retirement obligations

     628         624   

Regulatory liabilities

     1,191         1,095   

Other

     270         271   
  

 

 

    

 

 

 

Total deferred credits and other liabilities

     5,428         5,170   
  

 

 

    

 

 

 

Total liabilities

     14,510         14,537   
  

 

 

    

 

 

 

Commitments and Contingencies (see Note 12)

     
  

 

 

    

 

 

 

Preferred Stock Not Subject to Mandatory Redemption

     257         257   
  

 

 

    

 

 

 

Common Shareholder’s Equity

     

Common stock – no par(2)

     5,738         5,738   

Other paid-in capital

     1,111         1,111   

Retained earnings

     1,973         1,882   

Accumulated other comprehensive income

     27         19   
  

 

 

    

 

 

 

Total common shareholder’s equity

     8,849         8,750   
  

 

 

    

 

 

 

Total liabilities and shareholder’s equity

   $ 23,616       $ 23,544   
  

 

 

    

 

 

 

 

(1) Virginia Power’s Consolidated Balance Sheet at December 31, 2011 has been derived from the audited Consolidated Financial Statements at that date.
(2) 500,000 shares authorized; 274,723 shares outstanding at March 31, 2012 and December 31, 2011.

The accompanying notes are an integral part of Virginia Power’s Consolidated Financial Statements.

 

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VIRGINIA ELECTRIC AND POWER COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Three Months Ended March 31,

   2012     2011  
(millions)             

Operating Activities

    

Net income

   $ 243      $ 278   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization (including nuclear fuel)

     222        205   

Deferred income taxes and investment tax credits

     85        150   

Rate refunds

     (55     (29

Other adjustments

     (20     (32

Changes in:

    

Accounts receivable

     125        127   

Affiliated accounts receivable and payable

     (15     (31

Inventories

     20        (42

Deferred fuel expenses

     156        (32

Accounts payable

     (59     (69

Accrued interest, payroll and taxes

     137        25   

Other operating assets and liabilities

     67        (26
  

 

 

   

 

 

 

Net cash provided by operating activities

     906        524   
  

 

 

   

 

 

 

Investing Activities

    

Plant construction and other property additions

     (483     (408

Purchases of nuclear fuel

     (67     (49

Purchases of securities

     (193     (362

Proceeds from sales of securities

     191        343   

Restricted cash equivalents

     3        56   

Other

     (9     9   
  

 

 

   

 

 

 

Net cash used in investing activities

     (558     (411
  

 

 

   

 

 

 

Financing Activities

    

Repayment of short-term debt, net

     (639     (18

Repayment of affiliated current borrowings, net

     —          (44

Issuance and remarketing of long-term debt

     450        160   

Common dividend payments

     (149     (130

Preferred dividend payments

     (4     (4

Other

     (7     (2
  

 

 

   

 

 

 

Net cash used in financing activities

     (349     (38
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (1     75   

Cash and cash equivalents at beginning of period

     29        5   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 28      $ 80   
  

 

 

   

 

 

 

Supplemental Cash Flow Information

    

Significant noncash investing and financing activities:

    

Accrued capital expenditures

   $ 208      $ 121   
  

 

 

   

 

 

 

The accompanying notes are an integral part of Virginia Power’s Consolidated Financial Statements.

 

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COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Nature of Operations

Dominion, headquartered in Richmond, Virginia, is one of the nation’s largest producers and transporters of energy. Dominion’s operations are conducted through various subsidiaries, including Virginia Power, a regulated public utility that generates, transmits and distributes electricity for sale in Virginia and northeastern North Carolina.

Note 2. Significant Accounting Policies

As permitted by the rules and regulations of the SEC, Dominion’s and Virginia Power’s accompanying unaudited Consolidated Financial Statements contain certain condensed financial information and exclude certain footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with GAAP. These unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2011.

In Dominion’s and Virginia Power’s opinion, the accompanying unaudited Consolidated Financial Statements contain all adjustments necessary to present fairly their financial position as of March 31, 2012 and their results of operations and cash flows for the three months ended March 31, 2012 and 2011. Such adjustments are normal and recurring in nature unless otherwise noted.

The Companies make certain estimates and assumptions in preparing their Consolidated Financial Statements in accordance with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from those estimates.

Dominion’s and Virginia Power’s accompanying unaudited Consolidated Financial Statements include, after eliminating intercompany transactions and balances, their accounts and those of their respective majority-owned subsidiaries and those VIEs where Dominion has been determined to be the primary beneficiary.

The results of operations for interim periods are not necessarily indicative of the results expected for the full year. Information for quarterly periods is affected by seasonal variations in sales, rate changes, electric fuel and other energy-related purchases, purchased gas expenses and other factors.

Certain amounts in Dominion’s and Virginia Power’s 2011 Consolidated Financial Statements and Notes have been reclassified to conform to the 2012 presentation for comparative purposes. The reclassifications did not affect the Companies’ net income, total assets, liabilities, equity or cash flows.

Amounts disclosed for Dominion are inclusive of Virginia Power, where applicable.

 

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Note 3. Operating Revenue

The Companies’ operating revenue consists of the following:

 

     Three Months Ended
March  31,
 
     2012      2011  
(millions)              

Dominion

     

Electric sales:

     

Regulated

   $ 1,724       $ 1,730   

Nonregulated

     738         941   

Gas sales:

     

Regulated

     99         139   

Nonregulated

     398         602   

Gas transportation and storage

     405         538   

Other

     128         107   
  

 

 

    

 

 

 

Total operating revenue

   $ 3,492       $ 4,057   
  

 

 

    

 

 

 

Virginia Power

     

Regulated electric sales

   $ 1,724       $ 1,730   

Other

     30         27   
  

 

 

    

 

 

 

Total operating revenue

   $ 1,754       $ 1,757   
  

 

 

    

 

 

 

Note 4. Income Taxes

For continuing operations, including noncontrolling interests, the statutory U.S. federal income tax rate reconciles to Dominion’s and Virginia Power’s effective income tax rate as follows:

 

     Dominion     Virginia Power  

Three Months Ended March 31,

   2012     2011     2012     2011  

U.S. statutory rate

     35.0     35.0     35.0     35.0

Increases (reductions) resulting from:

        

State taxes, net of federal benefit

     3.8        3.7        3.9        3.9   

Valuation allowances

     (2.7     0.8        —          —     

AFUDC - equity

     (0.7     (0.7     (0.9     (1.1

Other, net

     (1.3     0.3        (0.2     0.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective tax rate

     34.1     39.1     37.8     38.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Dominion’s effective tax rate in 2012 reflects a $20 million reduction of a valuation allowance related to certain state operating loss carryforwards. As disclosed in Note 16 to the Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2011, Dominion expects to purchase Fairless in 2013. Dominion currently operates the facility under a lease and, as a result of a 2012 contract modification, the exercise price of Dominion’s option to purchase Fairless is fixed at approximately $923 million. After considering the results of Fairless’ operations in recent years and a forecast of future operating results reflecting the planned purchase of the facility, Dominion has concluded that it is more likely than not that the tax benefit of the operating losses will be realized. Significant assumptions include future commodity prices, in particular, those for electric energy produced by Fairless and those for natural gas, as compared to other fuels used for the generation of electricity, which will significantly influence the extent to which Fairless is dispatched by PJM. Realization of these tax benefits ultimately depends on whether or not the forecasted results are achieved. Dominion will continue to evaluate the likelihood of realizing these tax benefits on a quarterly basis.

As of March 31, 2012, there have been no material changes in Dominion’s and Virginia Power’s unrecognized tax benefits or possible changes that could reasonably be expected to occur during the next twelve months. See Note 6 to the Consolidated Financial Statements in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2011 for a discussion of these unrecognized tax benefits.

 

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Note 5. Earnings Per Share

The following table presents the calculation of Dominion’s basic and diluted EPS:

 

     Three Months Ended
March 31,
 
     2012      2011  
(millions, except EPS)              

Net income attributable to Dominion

   $ 494       $ 479   
  

 

 

    

 

 

 

Average shares of common stock outstanding – Basic

     570.5         579.8   

Net effect of potentially dilutive securities(1)

     1.4         0.7   
  

 

 

    

 

 

 

Average shares of common stock outstanding – Diluted

     571.9         580.5   
  

 

 

    

 

 

 

Earnings Per Common Share – Basic

   $ 0.87       $ 0.83   

Earnings Per Common Share – Diluted

   $ 0.86       $ 0.82   
  

 

 

    

 

 

 

 

(1) Potentially dilutive securities consist of options, goal-based stock and contingently convertible senior notes.

There were no potentially dilutive securities excluded from the calculation of diluted EPS for the three months ended March 31, 2012 and 2011.

Note 6. Fair Value Measurements

Dominion’s and Virginia Power’s fair value measurements are made in accordance with the policies discussed in Note 7 to the Consolidated Financial Statements in their Annual Report on Form 10-K for the year ended December 31, 2011. See Note 7 in this report for further information about their derivatives and hedge accounting activities.

At March 31, 2012, Dominion’s and Virginia Power’s net balance of commodity derivatives categorized as Level 3 fair value measurements was a net liability of $61 million and $17 million, respectively.

Dominion’s and Virginia Power’s commodity derivative valuations are prepared by the ERM department. The ERM department reports directly to the Companies’ CFO. The ERM department creates a daily computer-generated file containing mark-to-market valuations for the Companies’ derivative transactions. Standard transactions are programmatically calculated using software. The inputs that go into the mark-to-market valuations are transactional information stored in the systems of record and market pricing information that resides in data warehouse databases. The majority of forward prices are automatically uploaded into the data warehouse databases from various third party sources. Inputs obtained from third party sources are evaluated for reliability considering the reputation, independence, market presence, and methodology used by the third party. If forward prices are not available from third party sources, then the ERM department models the forward prices based on other available market data. A team consisting of risk management and risk quantitative analysts meets each business day to assess the validity of market prices and mark-to-market valuations. During this meeting, the changes in mark-to-market valuations from period to period are examined and qualified against historical expectations. If any discrepancies are identified during this process, the mark-to-market valuations or the market pricing information is evaluated further and adjusted, if necessary.

Dominion and Virginia Power use the discounted cash flow method to value Level 3 physical and financial forwards and futures and an option model to value Level 3 physical and financial options. The discounted cash flow model calculates mark-to-market valuations based on forward market prices, original transaction prices, volumes, risk-free rate of return and credit spreads. The option model calculates mark-to-market valuations using variations of the Black-Scholes option model. The inputs into the models are the forward market prices, implied price volatilities, risk-free rate of return, the option expiration dates, the option strike prices, price correlations, the original sales prices, and volumes. For Level 3 fair value measurements, the forward market prices, the implied price volatilities, and price correlations are considered unobservable. The unobservable inputs are developed and substantiated using historical information, available market data, third party data, and statistical analysis. Periodically, inputs to valuation models are reviewed and revised as needed, based on historical information, updated market data, market liquidity and relationships, and changes in third party pricing sources.

 

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Table of Contents

The following table presents Dominion’s quantitative information about Level 3 fair value measurements. Included are descriptions of the valuation techniques, the significant unobservable inputs, and the range of market price, price correlation and price volatility inputs used in the fair value measurements at March 31, 2012 for each category of transaction and commodity type. The range and weighted average are presented in dollars for market price inputs and percentages for price volatility and correlations.

 

     Fair Value
(millions)
     Valuation Technique(s)    Unobservable Input     Range     Weighted
Average(1)
 

At March 31, 2012

            

Assets:

            

Physical and Financial Forwards and Futures:

            

Natural Gas(2)

   $ 31       Discounted Cash Flow      Market Price (per  Dth (3)      (1) - 6        3   

Electricity

     69       Discounted Cash Flow      Market Price (per  MWh (3)      21 - 61        43   

FTRs

     1       Discounted Cash Flow      Market Price (per  MWh (3)      (3) - 3        —     

Capacity

     9       Discounted Cash Flow      Market Price (per  MW (3)      95-120        101   

Liquids

     1       Discounted Cash Flow      Market Price (per  Gal (3)      1 - 2        1   

Physical and Financial Options:

            

Natural Gas

     6       Option Model      Market Price (per  Dth (3)      2 - 5        4   
           Price Volatility   (4)      23% - 60     30
           Price Correlation   (5)      100% - 100     100
  

 

 

           

Total assets

   $ 117             
  

 

 

           

Liabilities:

            

Physical and Financial Forwards and Futures:

            

Natural Gas(2)

   $ 21       Discounted Cash Flow      Market Price (per  Dth (3)      (1) - 6        3   

Electricity

     17       Discounted Cash Flow      Market Price (per  MWh (3)      12 - 61        41   

FTRs

     18       Discounted Cash Flow      Market Price (per  MWh (3)      (6) - 5        —     

Liquids

     108       Discounted Cash Flow      Market Price (per  Gal (3)      1 - 3        2   

Physical and Financial Options:

            

Natural Gas(2)

     14       Option Model      Market Price (per  Dth (3)      (1) - 5        2   
           Price Volatility   (4)      23% - 59     36
           Price Correlation   (5)      70% - 100     90
  

 

 

           

Total liabilities

   $ 178             
  

 

 

           

 

(1) Averages weighted by volume.
(2) Includes basis.
(3) Represents market prices beyond defined terms for Levels 1 & 2.
(4) Represents volatilities unrepresented in published markets.
(5) Represents intra-price correlations for which markets do not exist.

The following table presents Virginia Power’s quantitative information about Level 3 fair value measurements. Included are descriptions of the valuation techniques, the significant unobservable inputs, and the range of market price inputs used in the fair value measurements at March 31, 2012 for each category of transaction and commodity type. The range and weighted average are presented in dollars for market price inputs.

 

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Table of Contents
     Fair Value
(millions)
     Valuation Technique(s)   Unobservable Input     Range    Weighted
Average(1)
 

At March 31, 2012

            

Assets:

            

Physical and Financial Forwards and Futures:

            

FTRs

   $ 1       Discounted Cash Flow     Market Price (per  MWh )(2)    (3) - 3      0   
  

 

 

           

Total assets

   $ 1             
  

 

 

           

Liabilities:

            

Physical and Financial Forwards and Futures:

            

FTRs

   $ 18       Discounted Cash Flow     Market Price (per  MWh )(2)    (6) - 3      0   
  

 

 

           

Total liabilities

   $ 18             
  

 

 

           

 

(1) Averages weighted by volume.
(2) Represents market prices beyond defined terms for Levels 1 & 2.

Sensitivity of the fair value measurements to changes in the significant unobservable inputs is as follows:

 

Significant Unobservable Inputs

   Position   

Change to Input

   Impact on Fair Value
Measurement

Market Price

   Buy    Increase (decrease)    Gain (loss)

Market Price

   Sell    Increase (decrease)    Loss (gain)

Price Volatility

   Buy    Increase (decrease)    Gain (loss)

Price Volatility

   Sell    Increase (decrease)    Loss (gain)

Price Correlation

   Buy    Increase (decrease)    Loss (gain)

Price Correlation

   Sell    Increase (decrease)    Gain (loss)

Non-recurring Fair Value Measurements

During March 2011, Dominion determined that it was unlikely that State Line would participate in the May 2011 PJM capacity base residual auction that would commit State Line’s capacity from June 2014 through May 2015. This determination reflected an expectation that margins for coal-fired generation will remain compressed in the 2014 and 2015 period in combination with the expectation that State Line may be impacted during the same time period by environmental regulations that would likely require significant capital expenditures. As a result, Dominion evaluated State Line for impairment since it was more likely than not that State Line would be retired before the end of its previously estimated useful life. As a result of this evaluation, Dominion recorded an impairment charge of $55 million ($39 million after-tax) reflected in other operations and maintenance expense in its Consolidated Statement of Income, to write down State Line’s long-lived assets to their estimated fair value of less than $1 million. As management was not aware of any recent market transactions for comparable assets with sufficient transparency to develop a market approach to fair value, Dominion used the income approach (discounted cash flows) to estimate the fair value of State Line’s long-lived assets in the impairment test. This was considered a Level 3 fair value measurement due to the use of significant unobservable inputs including estimates of future power and other commodity prices. State Line was retired in March 2012.

 

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Recurring Fair Value Measurements

Dominion

The following table presents Dominion’s assets and liabilities that are measured at fair value on a recurring basis for each hierarchy level, including both current and noncurrent portions:

 

     Level 1      Level 2      Level 3      Total  
(millions)                            

At March 31, 2012

           

Assets:

           

Derivatives:

           

Commodity

   $ 54       $ 1,007       $ 117       $ 1,178   

Interest rate

     —           94         —           94   

Investments(1):

           

Equity securities:

           

U.S.:

           

Large cap

     1,933         —           —           1,933   

Other

     59         —           —           59   

Non-U.S.:

           

Large cap

     11         —           —           11   

Fixed income:

           

Corporate debt instruments

     —           317         —           317   

U.S. Treasury securities and agency debentures

     308         170         —           478   

State and municipal

     —           328         —           328   

Other

     —           20         —           20   

Cash equivalents and other

     —           82         —           82   

Restricted cash equivalents

     —           104         —           104   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 2,365       $ 2,122       $ 117       $ 4,604   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivatives:

           

Commodity

   $ 19       $ 737       $ 178       $ 934   

Interest rate

     —           176         —           176   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 19       $ 913       $ 178       $ 1,110   
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2011

           

Assets:

           

Derivatives:

           

Commodity

   $ 44       $ 828       $ 93       $ 965   

Interest rate

     —           105         —           105   

Investments(1):

           

Equity securities:

           

U.S.:

           

Large cap

     1,718         —           —           1,718   

Other

     51         —           —           51   

Non-U.S.:

           

Large cap

     10         —           —           10   

Fixed income:

           

Corporate debt instruments

     —           332         —           332   

U.S. Treasury securities and agency debentures

     277         181         —           458   

State and municipal

     —           329         —           329   

Other

     —           23         —           23   

Cash equivalents and other

     —           60         —           60   

Restricted cash equivalents

     —           141         —           141   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 2,100       $ 1,999       $ 93       $ 4,192   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivatives:

           

Commodity

   $ 10       $ 714       $ 164       $ 888   

Interest rate

     —           269         —           269   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 10       $ 983       $ 164       $ 1,157   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes investments held in the nuclear decommissioning and rabbi trusts.

 

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The following table presents the net change in Dominion’s assets and liabilities measured at fair value on a recurring basis and included in the Level 3 fair value category:

 

     Three Months Ended
March 31,
 
     2012     2011  
(millions)             

Beginning balance

   $ (71   $ (50

Total realized and unrealized gains (losses):

    

Included in earnings

     (35     14   

Included in other comprehensive income (loss)

     5        (94

Included in regulatory assets/liabilities

     11        (21

Settlements

     30        (16

Transfers out of Level 3

     (1     4   
  

 

 

   

 

 

 

Ending balance

   $ (61   $ (163
  

 

 

   

 

 

 

The amount of gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets/liabilities still held at the reporting date

   $ 1      $ 4   
  

 

 

   

 

 

 

The following table presents Dominion’s gains and losses included in earnings in the Level 3 fair value category:

 

     Operating
revenue
    Electric fuel
and other
energy-related
purchases
    Total  
(millions)                   

Three Months Ended March 31, 2012

      

Total gains (losses) included in earnings

   $ (9   $ (26   $ (35

The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets/liabilities still held at the reporting date

     1        —          1   
  

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2011

      

Total gains (losses) included in earnings

   $ (2   $ 16      $ 14   

The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets/liabilities still held at the reporting date

     4        —          4   
  

 

 

   

 

 

   

 

 

 

 

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Virginia Power

The following table presents Virginia Power’s assets and liabilities that are measured at fair value on a recurring basis for each hierarchy level, including both current and noncurrent portions:

 

     Level 1      Level 2      Level 3      Total  
(millions)                            

At March 31, 2012

           

Assets:

           

Derivatives:

           

Commodity

   $ —         $ —         $ 1       $ 1   

Investments(1):

           

Equity securities:

           

U.S.:

           

Large cap

     764         —           —           764   

Other

     27         —           —           27   

Fixed income:

           

Corporate debt instruments

     —           197         —           197   

U.S. Treasury securities and agency debentures

     123         65         —           188   

State and municipal

     —           129         —           129   

Other

     —           13         —           13   

Cash equivalents and other

     —           41         —           41   

Restricted cash equivalents

     —           29         —           29   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 914       $ 474       $ 1       $ 1,389   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivatives:

           

Commodity

   $ —         $ 21       $ 18       $ 39   

Interest rate

     —           38         —           38   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ —         $ 59       $ 18       $ 77   
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2011

           

Assets:

           

Derivatives:

           

Commodity

   $ —         $ —         $ 2       $ 2   

Investments(1):

           

Equity securities:

           

U.S.:

           

Large cap

     679         —           —           679   

Other

     23         —           —           23   

Fixed income:

           

Corporate debt instruments

     —           214         —           214   

U.S. Treasury securities and agency debentures

     107         63         —           170   

State and municipal

     —           125         —           125   

Other

     —           16         —           16   

Cash equivalents and other

     —           40         —           40   

Restricted cash equivalents

     —           32         —           32   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 809       $ 490       $ 2       $ 1,301   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivatives:

           

Commodity

   $ —         $ 17       $ 30       $ 47   

Interest rate

     —           100         —           100   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ —         $ 117       $ 30       $ 147   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes investments held in the nuclear decommissioning and rabbi trusts.

 

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The following table presents the net change in Virginia Power’s assets and liabilities measured at fair value on a recurring basis and included in the Level 3 fair value category:

 

     Three Months Ended
March 31,
 
     2012     2011  
(millions)             

Beginning balance

   $ (28   $ 14   

Total realized and unrealized gains (losses):

    

Included in earnings

     (27     16   

Included in regulatory assets/liabilities

     11        (21

Settlements

     27        (16
  

 

 

   

 

 

 

Ending balance

   $ (17   $ (7
  

 

 

   

 

 

 

The gains and losses included in earnings in the Level 3 fair value category were classified in electric fuel and other energy-related purchases in Virginia Power’s Consolidated Statements of Income for the three months ended March 31, 2012 and 2011. There were no unrealized gains and losses included in earnings in the Level 3 fair value category relating to assets/liabilities still held at the reporting date for the three months ended March 31, 2012 and 2011.

Fair Value of Financial Instruments

Substantially all of Dominion’s and Virginia Power’s financial instruments are recorded at fair value, with the exception of the instruments described below that are reported at historical cost. Estimated fair values have been determined using available market information and valuation methodologies considered appropriate by management. The carrying amount of cash and cash equivalents, customer and other receivables, short-term debt and accounts payable are representative of fair value because of the short-term nature of these instruments. For Dominion’s and Virginia Power’s financial instruments that are not recorded at fair value, the carrying amounts and estimated fair values are as follows:

 

     March 31, 2012      December 31, 2011  
     Carrying
Amount
     Estimated  Fair
Value(1)
     Carrying
Amount
     Estimated  Fair
Value(1)
 
(millions)                            

Dominion

           

Long-term debt, including securities due within one year(2)

   $ 16,695       $ 19,256       $ 16,264       $ 18,936   

Long-term debt, VIE(3)

     882         889         890         892   

Junior subordinated notes payable to affiliates

     268         272         268         268   

Enhanced junior subordinated notes

     1,365         1,437         1,451         1,518   

Subsidiary preferred stock(4)

     257         259         257         256   
  

 

 

    

 

 

    

 

 

    

 

 

 

Virginia Power

           

Long-term debt, including securities due within one year(2)

   $ 7,308       $ 8,628       $ 6,862       $ 8,281   

Preferred stock(4)

     257         259         257         256   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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. All fair value measurements are classified as Level 2. 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 amounts which represent the unamortized discount and premium. At March 31, 2012 and December 31, 2011, includes the valuation of certain fair value hedges associated with Dominion’s fixed rate debt of approximately $93 million and $105 million, respectively.
(3) Includes amounts which represent the unamortized premium.
(4) Includes deferred issuance expenses of $2 million at March 31, 2012 and December 31, 2011.

 

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Note 7. Derivatives and Hedge Accounting Activities

Dominion’s and Virginia Power’s accounting policies and objectives and strategies for using derivative instruments are discussed in Note 2 to the Consolidated Financial Statements in their Annual Report on Form 10-K for the year ended December 31, 2011. See Note 6 in this report for further information about fair value measurements and associated valuation methods for derivatives.

Dominion

The following table presents the volume of Dominion’s derivative activity as of March 31, 2012. These volumes are based on open derivative positions and represent the combined absolute value of their long and short positions, except in the case of offsetting transactions, for which they represent the absolute value of the net volume of their long and short positions.

 

     Current      Noncurrent  

Natural Gas (bcf):

     

Fixed price(1)

     315         74   

Basis(1)

     861         484   

Electricity (MWh):

     

Fixed price(1)

     21,953,642         21,718,420   

FTRs

     21,805,241         810,816   

Capacity (MW)

     63,825         272,968   

Liquids (gallons)(2)

     137,508,000         221,214,000   

Interest rate

   $ 2,000,000,000       $ 1,940,000,000   

 

(1) Includes options.
(2) Includes NGLs and oil.

For the three months ended March 31, 2012, gains or losses on hedging instruments determined to be ineffective and amounts excluded from the assessment of effectiveness were not material. Amounts excluded from the assessment of effectiveness include gains or losses attributable to changes in the time value of options and changes in the differences between spot prices and forward prices.

The following table presents selected information related to gains (losses) on cash flow hedges included in AOCI in Dominion’s Consolidated Balance Sheet at March 31, 2012:

 

     AOCI
After-Tax
    Amounts Expected to be
Reclassified to Earnings
during the
next  12 Months
After-Tax
    Maximum Term  
(millions)                   

Commodities:

      

Gas

   $ (30   $ (16     33 months   

Electricity

     243        102        45 months   

NGLs

     (64     (27     33 months   

Other

     6        2        38 months   

Interest rate

     (97     (12     369 months   
  

 

 

   

 

 

   

Total

   $ 58      $ 49     
  

 

 

   

 

 

   

The amounts that will be reclassified from AOCI to earnings will generally be offset by the recognition of the hedged transactions (e.g., anticipated sales) in earnings, thereby achieving the realization of prices contemplated by the underlying risk management strategies and will vary from the expected amounts presented above as a result of changes in market prices and interest rates.

 

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Table of Contents

Fair Value and Gains and Losses on Derivative Instruments

The following table presents the fair values of Dominion’s derivatives and where they are presented in its Consolidated Balance Sheets:

 

    Fair Value  –
Derivatives under
Hedge Accounting
     Fair Value  –
Derivatives not under
Hedge Accounting
     Total Fair Value  
(millions)                    

March 31, 2012

       

ASSETS

       

Current Assets

       

Commodity

  $ 312       $ 472       $ 784   

Interest rate

    38         —           38   
 

 

 

    

 

 

    

 

 

 

Total current derivative assets

    350         472         822   
 

 

 

    

 

 

    

 

 

 

Noncurrent Assets

       

Commodity

    295         99         394   

Interest rate

    56         —           56   
 

 

 

    

 

 

    

 

 

 

Total noncurrent derivative assets(1)

    351         99         450   
 

 

 

    

 

 

    

 

 

 

Total derivative assets

  $ 701       $ 571       $ 1,272   
 

 

 

    

 

 

    

 

 

 

LIABILITIES

       

Current Liabilities

       

Commodity

  $ 206       $ 492       $ 698   

Interest rate

    158         15         173   
 

 

 

    

 

 

    

 

 

 

Total current derivative liabilities

    364         507         871   
 

 

 

    

 

 

    

 

 

 

Noncurrent Liabilities

       

Commodity

    151         85         236   

Interest rate

    —           3         3   
 

 

 

    

 

 

    

 

 

 

Total noncurrent derivative liabilities(2)

    151         88         239   
 

 

 

    

 

 

    

 

 

 

Total derivative liabilities

  $ 515       $ 595       $ 1,110   
 

 

 

    

 

 

    

 

 

 

December 31, 2011

       

ASSETS

       

Current Assets

       

Commodity

  $ 176       $ 495       $ 671   

Interest rate

    34         —           34   
 

 

 

    

 

 

    

 

 

 

Total current derivative assets

    210         495         705   
 

 

 

    

 

 

    

 

 

 

Noncurrent Assets

       

Commodity

    198         96         294   

Interest rate

    71         —           71   
 

 

 

    

 

 

    

 

 

 

Total noncurrent derivative assets(1)

    269         96         365   
 

 

 

    

 

 

    

 

 

 

Total derivative assets

  $ 479       $ 591       $ 1,070   
 

 

 

    

 

 

    

 

 

 

LIABILITIES

       

Current Liabilities

       

Commodity

  $ 162       $ 530       $ 692   

Interest rate

    222         37         259   
 

 

 

    

 

 

    

 

 

 

Total current derivative liabilities

    384         567         951   
 

 

 

    

 

 

    

 

 

 

Noncurrent Liabilities

       

Commodity

    118         78         196   

Interest rate

    —           10         10   
 

 

 

    

 

 

    

 

 

 

Total noncurrent derivative liabilities(2)

    118         88         206   
 

 

 

    

 

 

    

 

 

 

Total derivative liabilities

  $ 502       $ 655       $ 1,157   
 

 

 

    

 

 

    

 

 

 

 

(1) Noncurrent derivative assets are presented in other deferred charges and other assets in Dominion’s Consolidated Balance Sheets.
(2) Noncurrent derivative liabilities are presented in other deferred credits and other liabilities in Dominion’s Consolidated Balance Sheets.

 

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The following tables present the gains and losses on Dominion’s derivatives, as well as where the associated activity is presented in its Consolidated Balance Sheets and Statements of Income:

 

Derivatives in cash flow hedging relationships

   Amount of Gain
(Loss)  Recognized
in AOCI on
Derivatives -
Effective
Portion(1)
    Amount of Gain
(Loss)  Reclassified
from AOCI to
Income
    Increase
(Decrease)  in
Derivatives
Subject to
Regulatory
Treatment(2)
 
(millions)                   

Three Months Ended March 31, 2012

      

Derivative Type and Location of Gains (Losses)

      

Commodity:

      

Operating revenue

     $ 64     

Purchased gas

       (30  

Electric fuel and other energy-related purchases

       (7  
  

 

 

   

 

 

   

 

 

 

Total commodity

   $ 176        27      $ (1
  

 

 

   

 

 

   

 

 

 

Interest rate(3)

     32        1        27   
  

 

 

   

 

 

   

 

 

 

Total

   $ 208      $ 28      $ 26   
  

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2011

      

Derivative Type and Location of Gains (Losses)

      

Commodity:

      

Operating revenue

     $ 28     

Purchased gas

       (48  

Electric fuel and other energy-related purchases

       1     

Purchased electric capacity

       1     
  

 

 

   

 

 

   

 

 

 

Total commodity

   $ (142     (18   $ (5
  

 

 

   

 

 

   

 

 

 

Interest rate(3)

     (1     —          (1
  

 

 

   

 

 

   

 

 

 

Total

   $ (143   $ (18   $ (6
  

 

 

   

 

 

   

 

 

 

 

(1) Amounts deferred into AOCI have no associated effect in Dominion’s Consolidated Statements of Income.
(2) Represents net derivative activity deferred into and amortized out of regulatory assets/liabilities. Amounts deferred into regulatory assets/liabilities have no associated effect in Dominion’s Consolidated Statements of Income.
(3) Amounts recorded in Dominion’s Consolidated Statements of Income are classified in interest and related charges.

 

     Amount of Gain (Loss) Recognized in Income on
Derivatives(1)
 
     Three Months Ended
March 31,
 

Derivatives not designated as hedging instruments

   2012     2011  
(millions)             

Derivative Type and Location of Gains (Losses)

    

Commodity

    

Operating revenue

   $ 69      $ 19   

Purchased gas

     (10     (11

Electric fuel and other energy-related purchases

     (27     16   

Interest rate(2)

     (2     —