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, 2010

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 Companies: 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  ¨    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, 2010, the latest practicable date for determination, Dominion had 596,053,590 shares of common stock outstanding and Virginia Power had 256,310 shares of common stock outstanding. Dominion 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 Power makes no representations as to the information relating to Dominion’s other operations.

 

 

 


Table of Contents

COMBINED INDEX

 

          Page
Number
   Glossary of Terms    3
     PART I. Financial Information     

Item 1.

   Financial Statements    5

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    43

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    56

Item 4.

   Controls and Procedures    57
     PART II. Other Information     

Item 1.

   Legal Proceedings    58

Item 1A.

   Risk Factors    58

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    59

Item 6.

   Exhibits    60

 

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

AOCI

  

Accumulated other comprehensive income (loss)

bcf

  

Billion cubic feet

bcfe

  

Billion cubic feet equivalent

Bear Garden

  

A 580 MW combined cycle, natural gas-fired power station under construction in Buckingham County, Virginia

BP

  

BP Alternative Energy, Inc.

CEO

  

Chief Executive Officer

CFO

  

Chief Financial Officer

COL

  

Combined Construction Permit and Operating License

DD&A

  

Depreciation, depletion and amortization expense

DEI

  

Dominion Energy, Inc.

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

Dominion  Direct®

  

A dividend reinvestment and open enrollment direct stock purchase plan

Dominion East Ohio

  

The East Ohio Gas Company

DRS

  

Dominion Resources Services, Inc.

DSM

  

Demand-side management

DTI

  

Dominion Transmission, Inc.

DVP

  

Dominion Virginia Power operating segment

E&P

  

Exploration & production

EPA

  

Environmental Protection Agency

EPS

  

Earnings per share

Fowler Ridge

  

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

FTRs

  

Financial transmission rights

GAAP

  

U.S. generally accepted accounting principles

GHG

  

Greenhouse gas

Hope

  

Hope Gas, Inc.

LNG

  

Liquefied natural gas

Local 69

  

Utility Workers’ Union of America, AFL-CIO, Local 69

mcf

  

Thousand cubic feet

mcfe

  

Thousand cubic feet equivalent

MD&A

  

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

MISO

  

The Midwest Independent System Operator, Inc.

Moody’s

  

Moody’s Investors Service

MW

  

Megawatt

MWh

  

Megawatt hour

NGLs

  

Natural gas liquids

NCEMC

  

North Carolina Electric Membership Cooperative

NedPower

  

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

NRC

  

Nuclear Regulatory Commission

ODEC

  

Old Dominion Electric Cooperative

Peoples

  

The Peoples Natural Gas Company

PIPP

  

Percentage of income payment plan

PJM

  

PJM Interconnection, LLC

PNG Companies LLC

  

An indirect subsidiary of SteelRiver Infrastructure Fund North America

Regulation Act

  

The Virginia Electric Utility Regulation Act

Riders C1 and C2

  

Rate adjustment clauses associated with the recovery of costs related to certain DSM programs proposed by Virginia Power

Rider R

  

A rate adjustment clause associated with recovery of construction-related financing costs for Bear Garden

 

PAGE    3


Table of Contents

Abbreviation or Acronym

  

Definition

Rider S

  

A rate adjustment clause associated with the recovery of construction-related financing costs for the Virginia City Hybrid Energy Center

Rider T   

A rate adjustment clause associated with the recovery of certain Virginia jurisdictional transmission-related expenditures

ROE

  

Return on equity

RTO

  

Regional transmission organization

SEC

  

Securities and Exchange Commission

Standard & Poor’s

  

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

the Companies

  

Dominion and Virginia Power, collectively

U.S.

  

United States of America

VIE

  

Variable interest entity

Virginia Commission

  

Virginia State Corporation Commission

Virginia City Hybrid Energy Center

  

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

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

VPP

  

Volumetric production payment

 

PAGE    4


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DOMINION RESOURCES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months Ended
March 31,
 

(millions, except per share amounts)

   2010     2009  

Operating Revenue

   $ 4,168     $ 4,586   
                

Operating Expenses

    

Electric fuel and other energy-related purchases

     1,028       1,141  

Purchased electric capacity

     108       108  

Purchased gas

     792       1,007  

Other operations and maintenance

     1,068       1,234  

Depreciation, depletion and amortization

     269       279  

Other taxes

     169       153  
                

Total operating expenses

     3,434       3,922  
                

Income from operations

     734       664  
                

Other income (loss)

     71       (61

Interest and related charges

     183       219  
                

Income from continuing operations including noncontrolling interests before income tax expense

     622       384  

Income tax expense

     295       141  
                

Income from continuing operations including noncontrolling interests

     327       243  

Income (loss) from discontinued operations(1)

     (149     9  
                

Net Income Including Noncontrolling Interests

     178       252  

Noncontrolling Interests

     4       4  
                

Net Income Attributable to Dominion

   $ 174     $ 248  
                

Amounts Attributable to Dominion:

    

Income from continuing operations, net of tax

   $ 323     $ 239  

Income (loss) from discontinued operations, net of tax

     (149     9  
                

Net income attributable to Dominion

   $ 174     $ 248  
                

Earnings Per Common Share – Basic and Diluted

    

Income from continuing operations

   $ 0.54     $ 0.41  

Income (loss) from discontinued operations

     (0.25     0.01  
                

Net income attributable to Dominion

   $ 0.29     $ 0.42  
                

Dividends paid per common share

   $ 0.4575     $ 0.4375  
                

 

(1) Includes income tax expense of $12 million and $26 million for the three months ended March 31, 2010 and 2009, respectively.

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

 

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Table of Contents

DOMINION RESOURCES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(millions)

   March 31,
2010
    December  31,
2009(1)
 

ASSETS

    

Current Assets

    

Cash and cash equivalents

   $ 85     $ 48  

Customer receivables (less allowance for doubtful accounts of $31 at both dates)

     1,955       2,050  

Other receivables (less allowance for doubtful accounts of $14 at both dates)

     105       130  

Inventories

     984       1,185  

Derivative assets

     1,638       1,128  

Assets held for sale

     —          1,018  

Prepayments

     147       405  

Other

     1,119       853  
                

Total current assets

     6,033       6,817  
                

Investments

    

Nuclear decommissioning trust funds

     2,735       2,625  

Investment in equity method affiliates

     601       595  

Other

     276       272  
                

Total investments

     3,612       3,492  
                

Property, Plant and Equipment

    

Property, plant and equipment

     39,729       39,036  

Accumulated depreciation, depletion and amortization

     (13,691     (13,444
                

Total property, plant and equipment, net

     26,038       25,592  
                

Deferred Charges and Other Assets

    

Goodwill

     3,275       3,354  

Regulatory assets

     1,240       1,390  

Other

     1,965       1,909  
                

Total deferred charges and other assets

     6,480       6,653  
                

Total assets

   $ 42,163     $ 42,554  
                

 

(1) Dominion’s Consolidated Balance Sheet at December 31, 2009 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.

 

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Table of Contents

DOMINION RESOURCES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(millions)

   March 31,
2010
    December  31,
2009(1)
 

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

Current Liabilities

    

Securities due within one year

   $ 1,254     $ 1,137  

Short-term debt

     295       1,295  

Accounts payable

     1,324       1,401  

Accrued interest, payroll and taxes

     772       676  

Derivative liabilities

     1,126       679  

Liabilities held for sale

     —          428  

Regulatory liabilities

     598       536  

Other

     1,123       681  
                

Total current liabilities

     6,492       6,833  
                

Long-Term Debt

    

Long-term debt

     13,613       13,730  

Junior subordinated notes payable to affiliates

     268       268  

Enhanced junior subordinated notes

     1,483       1,483  
                

Total long-term debt

     15,364       15,481  
                

Deferred Credits and Other Liabilities

    

Deferred income taxes and investment tax credits

     4,251       4,244  

Asset retirement obligations

     1,625       1,605  

Pension and other postretirement benefit liabilities

     1,385       1,260  

Regulatory liabilities

     1,244       1,215  

Other

     494       474  
                

Total deferred credits and other liabilities

     8,999       8,798  
                

Total liabilities

     30,855       31,112  
                

Commitments and Contingencies (see Note 15)

    

Subsidiary Preferred Stock Not Subject to Mandatory Redemption

     257       257  
                

Common Shareholders’ Equity

    

Common stock – no par(2)

     6,369       6,525  

Other paid-in capital

     138       185  

Retained earnings

     4,585       4,686  

Accumulated other comprehensive loss

     (41     (211
                

Total common shareholders’ equity

     11,051       11,185  
                

Total liabilities and shareholders’ equity

   $ 42,163     $ 42,554  
                

 

(1) Dominion’s Consolidated Balance Sheet at December 31, 2009 has been derived from the audited Consolidated Financial Statements at that date.
(2) 1 billion shares authorized; 596 million and 599 million shares outstanding at March 31, 2010 and December 31, 2009, respectively.

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

 

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Table of Contents

DOMINION RESOURCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Three Months Ended March 31,

(millions)

   2010     2009  

Operating Activities

    

Net income including noncontrolling interests

   $ 178     $ 252  

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

    

Charges related to workforce reduction program

     338       —     

Loss from sale of Peoples

     117       —     

Impairment of gas and oil properties

     21       455  

Net change in realized and unrealized derivative (gains) losses

     87       (45

Depreciation, depletion and amortization

     320       325  

Deferred income taxes and investment tax credits

     (173     (365

Other adjustments

     (10     93  

Changes in:

    

Accounts receivable

     126       95  

Inventories

     213       271  

Deferred fuel and purchased gas costs

     (7     226  

Accounts payable

     (90     (264

Accrued interest, payroll and taxes

     89       223  

Margin deposit assets and liabilities

     114       (21

Prepayments

     260       35  

Other operating assets and liabilities

     67       201  
                

Net cash provided by operating activities

     1,650       1,481  
                

Investing Activities

    

Plant construction and other property additions

     (877     (796

Additions to gas and oil properties

     (27     (41

Proceeds from the sale of Peoples

     737       —     

Proceeds from sale of securities

     513       289  

Purchases of securities

     (539     (289

Other

     22       (37
                

Net cash used in investing activities

     (171     (874
                

Financing Activities

    

Repayment of short-term debt, net

     (1,000     (411

Repayment of long-term debt

     (4     (4

Issuance of common stock

     27       147  

Repurchase of common stock

     (191     —     

Common dividend payments

     (275     (257

Subsidiary preferred dividend payments

     (4     (4

Other

     3       (2
                

Net cash used in financing activities

     (1,444     (531
                

Increase in cash and cash equivalents

     35       76  

Cash and cash equivalents at beginning of period(1)

     50       71  
                

Cash and cash equivalents at end of period(2)

   $ 85     $ 147  
                

Supplemental Cash Flow Information

    

Significant Noncash Investing and Financing Activities

    

Accrued capital expenditures

   $ 166     $ 186  

Debt for equity exchange

     —          56  

 

(1) 2010 and 2009 amounts include $2 million and $5 million, respectively, of cash classified as held for sale in Dominion’s Consolidated Balance Sheets.
(2) 2009 amount includes $6 million of cash classified as held for sale in Dominion’s Consolidated Balance Sheet.

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

 

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Table of Contents

VIRGINIA ELECTRIC AND POWER COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months Ended
March  31,

(millions)

   2010    2009

Operating Revenue

   $ 1,739    $ 1,859
             

Operating Expenses

     

Electric fuel and other energy-related purchases

     632      794

Purchased electric capacity

     107      108

Other operations and maintenance:

     

Affiliated suppliers

     120      101

Other

     399      246

Depreciation and amortization

     163      157

Other taxes

     64      51
             

Total operating expenses

     1,485      1,457
             

Income from operations

     254      402
             

Other income

     14      9

Interest and related charges

     88      87
             

Income before income tax expense

     180      324

Income tax expense

     85      120
             

Net Income

     95      204

Preferred dividends

     4      4
             

Balance available for common stock

   $ 91    $ 200
             

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

 

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Table of Contents

VIRGINIA ELECTRIC AND POWER COMPANY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(millions)

   March 31,
2010
    December  31,
2009(1)
 

ASSETS

    

Current Assets

    

Cash and cash equivalents

   $ 53     $ 19  

Customer accounts receivable (less allowance for doubtful accounts of $10 and $12)

     827       880  

Other receivables (less allowance for doubtful accounts of $6 at both dates)

     59       72  

Inventories (average cost method)

     571       614  

Other

     540       511  
                

Total current assets

     2,050       2,096  
                

Investments

    

Nuclear decommissioning trust funds

     1,251       1,204  

Other

     3       4  
                

Total investments

     1,254       1,208  
                

Property, Plant and Equipment

    

Property, plant and equipment

     26,203       25,643  

Accumulated depreciation and amortization

     (9,448     (9,314
                

Total property, plant and equipment, net

     16,755       16,329  
                

Deferred Charges and Other Assets

    

Intangible assets

     216       217  

Regulatory assets

     200       200  

Other

     66       68  
                

Total deferred charges and other assets

     482       485  
                

Total assets

   $ 20,541     $ 20,118  
                

 

(1) Virginia Power’s Consolidated Balance Sheet at December 31, 2009 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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Table of Contents

VIRGINIA ELECTRIC AND POWER COMPANY

CONSOLIDATED BALANCE SHEETS—(Continued)

(Unaudited)

 

 

(millions)

   March 31,
2010
   December  31,
2009(1)

LIABILITIES AND SHAREHOLDER’S EQUITY

     

Current Liabilities

     

Securities due within one year

   $ 363    $ 245

Short-term debt

     —        442

Accounts payable

     390      390

Payables to affiliates

     85      67

Accrued interest, payroll and taxes

     357      213

Regulatory liabilities

     557      491

Other

     456      360
             

Total current liabilities

     2,208      2,208
             

Long-Term Debt

     6,093      6,213
             

Deferred Credits and Other Liabilities

     

Deferred income taxes and investment tax credits

     2,348      2,359

Asset retirement obligations

     642      636

Regulatory liabilities

     1,023      995

Other

     384      277
             

Total deferred credits and other liabilities

     4,397      4,267
             

Total liabilities

     12,698      12,688
             

Commitments and Contingencies (see Note 15)

     

Preferred Stock Not Subject to Mandatory Redemption

     257      257
             

Common Shareholder’s Equity

     

Common stock—no par( 2)

     5,171      4,738

Other paid-in capital

     1,110      1,110

Retained earnings

     1,282      1,299

Accumulated other comprehensive income

     23      26
             

Total common shareholder’s equity

     7,586      7,173
             

Total liabilities and shareholder’s equity

   $ 20,541    $ 20,118
             

 

(1) Virginia Power’s Consolidated Balance Sheet at December 31, 2009 has been derived from the audited Consolidated Financial Statements at that date.
(2) 300,000 shares authorized; 256,310 and 241,710 shares outstanding at March 31, 2010 and December 31, 2009, respectively.

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,

(millions)

   2010     2009  

Operating Activities

    

Net income

   $ 95     $ 204  

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

    

Charges related to workforce reduction program

     202       —     

Depreciation and amortization

     192       184  

Deferred income taxes and investment tax credits

     (59     (5

Other adjustments

     (18     1  

Changes in:

    

Accounts receivable

     65       75  

Affiliated accounts receivable and payable

     (20     (17

Inventories

     43       31  

Deferred fuel expenses

     5       104  

Accounts payable

     22       9  

Accrued interest, payroll and taxes

     143       65  

Other operating assets and liabilities

     99       33  
                

Net cash provided by operating activities

     769       684  
                

Investing Activities

    

Plant construction and other property additions

     (567     (515

Purchases of nuclear fuel

     (40     (40

Purchases of securities

     (317     (140

Proceeds from sales of securities

     304       137  

Other

     9       (50
                

Net cash used in investing activities

     (611     (608
                

Financing Activities

    

Issuance (repayment) of short-term debt, net

     (442     240  

Issuance (repayment) of affiliated current borrowings, net

     431       (208

Repayment of long-term debt

     (2     (2

Common dividend payments

     (108     (101

Preferred dividend payments

     (4     (4

Other

     1       (1
                

Net cash used in financing activities

     (124     (76
                

Increase in cash and cash equivalents

     34       —     

Cash and cash equivalents at beginning of period

     19       27  
                

Cash and cash equivalents at end of period

   $ 53     $ 27  
                

Supplemental Cash Flow Information

    

Significant noncash investing and financing activities:

    

Accrued capital expenditures

   $ 112     $ 128  

Conversion of short-term borrowings payable to Dominion to equity

   $ 433     $ —     
                

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.

As discussed in Note 3, Dominion completed the sale of its Pennsylvania gas distribution operations in February 2010 and in March 2010 entered into an agreement to sell substantially all of its Appalachian E&P operations.

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, 2009.

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, 2010 and their results of operations and cash flows for the three months ended March 31, 2010 and 2009. 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.

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 2009 Consolidated Financial Statements and Notes have been recast to conform to the 2010 presentation.

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

Note 3. Dispositions

Sale of Appalachian E&P Operations

In March 2010, Dominion entered into an agreement to sell substantially all of its Appalachian E&P operations to a newly-formed subsidiary of CONSOL Energy for approximately $3.5 billion, subject to adjustments pursuant to terms of the agreement. Also in March 2010, the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice granted early termination of the mandatory waiting period for the transaction under the Hart-Scott-Rodino Antitrust Improvements Act. The transaction is expected to close by April 30, 2010, subject to customary closing conditions.

The transaction includes the rights to approximately 491,000 acres in the Marcellus Shale formation. Dominion is retaining certain oil and natural gas wells located on or near its natural gas storage fields. Dominion expects the transaction to generate after-tax proceeds of approximately $2.3 billion and result in an after-tax gain of approximately $1.4 billion. Proceeds from the sale will be used to offset Dominion’s equity needs for 2010 and 2011, repurchase common stock, fund a contribution to Dominion’s employee benefit plans and offset the impact of Virginia Power’s rate case settlement.

 

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The results of operations for Dominion’s Appalachian E&P business are not reported as discontinued operations in the Consolidated Statements of Income since Dominion did not sell its entire U.S. cost pool, which includes the retained Appalachian assets located on or near its natural gas storage fields.

Due to the announced sale, hedge accounting was discontinued for certain cash flow hedges since it became probable that the forecasted sales of gas would not occur. In connection with the discontinuance of hedge accounting for these contracts, Dominion recognized a $42 million ($25 million after-tax) benefit, recorded in operating revenue in its Consolidated Statement of Income, reflecting the reclassification of gains from AOCI to earnings for these contracts in the three months ended March 31, 2010.

Sale of Peoples

In February 2010, Dominion completed the sale of Peoples to PNG Companies LLC and netted after-tax proceeds of approximately $542 million. The sale resulted in an after-tax loss of approximately $134 million, which included a $79 million write-off of goodwill. The sale also resulted in after-tax expenses of approximately $27 million, including transaction and benefit-related costs. In addition, Peoples had income from operations of $12 million after-tax for the three months ended March 31, 2010.

Dominion did not previously report Peoples as discontinued operations since it expected to have significant continuing cash flows related primarily to the sale to Peoples of natural gas production from its Appalachian E&P business. Due to the pending sale of its Appalachian E&P business, Dominion no longer expects to have significant continuing cash flows with Peoples; therefore, the results of Peoples were reclassified to discontinued operations in the Consolidated Statements of Income for all periods presented.

The carrying amounts of the major classes of assets and liabilities classified as held for sale in Dominion’s Consolidated Balance Sheet were as follows:

 

     December 31,
2009
 
(millions)       

ASSETS

  

Current Assets

  

Customer receivables

   $ 87  

Other

     56  
        

Total current assets

     143  
        

Property, Plant and Equipment

  

Property, plant and equipment

     985  

Accumulated depreciation, depletion and amortization

     (284
        

Total property, plant and equipment, net

     701  
        

Deferred Charges and Other Assets

  

Regulatory assets

     125  

Other

     49  
        

Total deferred charges and other assets

     174  
        

Assets held for sale

   $ 1,018  
        

LIABILITIES

  

Current Liabilities

   $ 133  

Deferred Credits and Other Liabilities

  

Deferred income taxes and investment tax credits

     238  

Other

     57  
        

Total deferred credits and other liabilities

     295  
        

Liabilities held for sale

   $ 428  
        

 

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The following table presents selected information regarding the results of operations of Peoples, which are reported as discontinued operations in the Consolidated Statements of Income:

 

     Three Months Ended
March  31,
     2010     2009
(millions)           

Operating revenue

   $ 67     $ 227

Income (loss) before income taxes

     (137 )(1)      35
              

 

(1) Includes pre-tax loss on the sale of $117 million.

Note 4. Ceiling Test

Dominion follows the full cost method of accounting for its gas and oil E&P activities, which subjects capitalized costs to a quarterly ceiling test using hedge-adjusted prices. At March 31, 2010, Dominion recorded a ceiling test impairment charge of $21 million ($13 million after-tax) in other operations and maintenance expense in its Consolidated Statement of Income primarily due to a decline in hedge-adjusted prices reflecting the discontinuance of hedge accounting for certain cash flow hedges, as discussed in Note 3.

In March 2009, Dominion recorded a ceiling test impairment charge of $455 million ($272 million after-tax) in other operations and maintenance expense in its Consolidated Statement of Income. Excluding the effects of hedge-adjusted prices in calculating the ceiling limitation, the impairment would have been $631 million ($378 million after-tax).

Note 5. Operating Revenue

The Companies’ operating revenue consists of the following:

 

     Three Months Ended
March  31,
     2010    2009
(millions)          

Dominion

     

Electric sales:

     

Regulated

   $ 1,717    $ 1,825

Nonregulated

     945      994

Gas sales:

     

Regulated

     145      330

Nonregulated

     782      931

Gas transportation and storage

     465      393

Other

     114      113
             

Total operating revenue

   $ 4,168    $ 4,586
             

Virginia Power

     

Regulated electric sales

   $ 1,717    $ 1,825

Other

     22      34
             

Total operating revenue

   $ 1,739    $ 1,859
             

 

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Note 6. Income Taxes

Continuing Operations

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,

   2010     2009     2010     2009  

U.S. statutory rate

   35.0 %   35.0 %   35.0 %   35.0 %

Increases (reductions) resulting from:

        

Legislative changes

   8.8     0.3     8.7     —     

State taxes, net of federal benefit

   3.8     3.3     4.1     3.8  

Domestic production activities deduction

   (0.5   (0.5   (1.0   (0.5

Investment and production tax credits

   (0.3   (1.0   —        0.1  

Amortization of investment tax credits

   —        (0.1   (0.2   (0.1

Other, net

   0.6     (0.3   0.7     (1.2
                        

Effective tax rate

   47.4 %   36.7 %   47.3 %   37.1 %
                        

Dominion’s and Virginia Power’s effective tax rates in 2010 reflect a reduction of deferred tax assets resulting from the enactment of the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of 2010 which eliminated the employer’s deduction, beginning in 2013, for that portion of its retiree prescription drug coverage cost that is being reimbursed by the Medicare Part D subsidy.

As of March 31, 2010, there have been no material changes in Dominion’s and Virginia Power’s unrecognized tax benefits. 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, 2009, for a discussion of these unrecognized tax benefits, including reasonably possible changes that could occur during the next twelve months.

Discontinued Operations

Income tax expense in 2010 for Dominion’s discontinued operations primarily reflects the impact of goodwill written off in the sale of Peoples that is not deductible for tax purposes and the reversal of deferred taxes for which the benefit was offset by the reversal of income tax-related regulatory assets.

Income tax expense in 2009 for Dominion’s discontinued operations also reflects the impact of these items. Since the sale of Peoples was expected to occur later in 2009, the tax effects related to the sale were included in the determination of Dominion’s estimated annual effective tax rate in 2009.

Note 7. Earnings Per Share

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

 

     Three Months Ended
March 31,
     2010    2009
(millions, except EPS)          

Net income attributable to Dominion

   $ 174    $ 248
             

Average shares of common stock outstanding – Basic

     599.9      585.3

Net effect of potentially dilutive securities(1)

     1.0      0.4
             

Average shares of common stock outstanding – Diluted

     600.9      585.7
             

Earnings Per Common Share – Basic and Diluted

   $ 0.29    $ 0.42
             

 

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

Potentially dilutive securities with the right to acquire approximately 1.6 million common shares for the three months ended March 31, 2009, were not included in the period’s calculation of diluted EPS because the exercise or purchase prices of those instruments were greater than the average market price of Dominion’s common shares. There were no potentially dilutive securities excluded from the calculation of diluted EPS for the three months ended March 31, 2010.

 

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Note 8. Comprehensive Income

The following table presents Dominion’s total comprehensive income:

 

     Three Months Ended
March 31,
     2010     2009
(millions)           

Net income including noncontrolling interests

   $ 178     $ 252

Other comprehensive income:

    

Net other comprehensive income associated with effective portion of changes in fair value of derivatives designated as cash flow hedges, net of taxes and amounts reclassified to earnings

     106       151

Other, net of tax

     64          24
              

Other comprehensive income

     170       175
              

Comprehensive income including noncontrolling interests

     348       427

Noncontrolling interests

     4       4
              

Total comprehensive income attributable to Dominion

   $ 344     $ 423
              

The following table presents Virginia Power’s total comprehensive income:

 

     Three Months Ended
March  31,
     2010     2009
(millions)           

Net income

   $ 95     $ 204

Other comprehensive income (loss):

    

Net other comprehensive income (loss) associated with effective portion of changes in fair value of derivatives designated as cash flow hedges, net of taxes and amounts reclassified to earnings

     (5     —  

Other, net of tax

     2       3
              

Other comprehensive income (loss)

     (3     3
              

Total comprehensive income

   $ 92     $ 207
              

Note 9. 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, 2009. See Note 10 in this report for further information about their derivatives and hedge accounting activities.

Fair values are based on inputs and assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and the risks inherent in valuation techniques and the inputs to valuations. The inputs and assumptions include the following:

For commodity and foreign currency derivative contracts:

 

 

Forward commodity prices

 

 

Forward foreign currency prices

 

 

Price volatility

 

 

Volumes

 

 

Commodity location

 

 

Interest rates

 

 

Credit quality of counterparties and Dominion and Virginia Power

 

 

Credit enhancements

 

 

Time value

 

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For interest rate derivative contracts:

 

 

Interest rate curves

 

 

Credit quality of counterparties and Dominion and Virginia Power

 

 

Credit enhancements

 

 

Time value

For investments:

 

 

Quoted securities prices

 

 

Securities trades information including volume and restrictions

 

 

Maturity

 

 

Interest rates

 

 

Credit quality

 

 

Net asset value (only for investments in partnerships)

Dominion and Virginia Power regularly evaluate and validate the inputs used to estimate fair value by a number of methods, including various market price verification procedures such as the use of pricing services and multiple broker quotes to support the market price of the various commodities in which the Companies transact, as well as review and verification of models.

For derivative contracts, Dominion and Virginia Power recognize transfers between Levels based on fair values as of the first day of the month in which the transfer occurs. Transfers out of Level 3 represent assets and liabilities that were previously classified as Level 3 for which the inputs became observable based on the criteria discussed in Note 7 to the Consolidated Financial Statements in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2009 for classification in either Level 1 or Level 2. Because the activity and liquidity of commodity markets vary substantially between regions and time periods, the availability of observable inputs for substantially the full term and value of the Companies’ over-the-counter derivative contracts is subject to change.

At March 31, 2010, Dominion’s and Virginia Power’s net balance of commodity derivatives categorized as Level 3 fair value measurements was a net liability of $60 million and $15 million, respectively. A hypothetical 10% increase in commodity prices would increase Dominion’s and Virginia Power’s net liability by $29 million and $1 million, respectively. A hypothetical 10% decrease in commodity prices would decrease Dominion’s and Virginia Power’s net liability by $28 million and $1 million, respectively.

During the first quarter of 2009, Dominion evaluated an equity method investment for impairment and recorded a $23 million impairment in other income (loss) in its Consolidated Statement of Income. The resulting fair value of $10 million was estimated using an expected present value cash flow model and was considered a Level 3 fair value measurement due to the use of significant unobservable inputs related to the timing and amount of future equity distributions based on the investee’s future financing structure, contractual and market based revenues and operating costs.

 

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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)                    

As of March 31, 2010

           

Assets

           

Derivatives:

           

Commodity

   $ 200    $ 1,576    $ 38    $ 1,814

Interest rate

     —        107      —        107

Investments:

           

Marketable equity securities

     1,663      —        —        1,663

Marketable debt securities:

           

Corporate bonds

     —        354      —        354

U.S. Treasury securities and agency debentures

     287      151      —        438

State and municipal

     —        211      —        211

Other

     1      13      —        14

Cash equivalents and other

     —        109      —        109
                           

Total assets

   $ 2,151    $ 2,521    $ 38    $ 4,710
                           

Liabilities

           

Derivatives:

           

Commodity

   $ 42    $ 1,192    $ 98    $ 1,332
                           

Total liabilities

   $ 42    $ 1,192    $ 98    $ 1,332
                           

As of December 31, 2009

           

Assets

           

Derivatives:

           

Commodity

   $ 85    $ 1,058    $ 41    $ 1,184

Interest rate

     —        176      —        176

Foreign currency

     —        2      —        2

Investments:

           

Marketable equity securities

     1,575      1      —        1,576

Marketable debt securities:

           

Corporate bonds

     —        253      —        253

U.S. Treasury securities and agency debentures

     216      78      —        294

State and municipal

     —        434      —        434

Other

     —        4      —        4

Cash equivalents and other

     —        54      —        54
                           

Total assets

   $ 1,876    $ 2,060    $ 41    $ 3,977
                           

Liabilities

           

Derivatives:

           

Commodity

   $ 17    $ 736    $ 107    $ 860

Interest rate

     —        1      —        1
                           

Total liabilities

   $ 17    $ 737    $ 107    $ 861
                           

 

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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,
 
     2010     2009  
(millions)             

Beginning balance

   $ (66   $ 99  

Total realized and unrealized gains (losses):

    

Included in earnings

     1       (62

Included in other comprehensive income (loss)

     24       20  

Included in regulatory assets/liabilities

     (5     23  

Purchases, issuances and settlements

     (15     34  

Transfers out of Level 3

     1       (16
                

Ending balance

   $ (60   $ 98  
                

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

   $ (17   $ (12
                

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
    Purchased gas     Total  
(millions)                         

Three Months Ended March 31, 2010

        

Total gains (losses) included in earnings

   $ (16   $ 21      $ (4   $ 1   

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

     (14     —          (3     (17
                                

Three Months Ended March 31, 2009

        

Total gains (losses) included in earnings

   $ (4   $ (51   $ (7   $ (62

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

     (9     3       (6     (12
                                

 

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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)                    

As of March 31, 2010

           

Assets

           

Derivatives

           

Commodity

   $ —      $ 25    $ 1    $ 26

Interest rate

     —        69      —        69

Investments:

           

Marketable equity securities

     669      —        —        669

Marketable debt securities:

           

Corporate bonds

     —        239      —        239

U.S. Treasury securities and agency debentures

     133      52      —        185

State and municipal

     —        33      —        33

Other

     —        7      —        7

Cash equivalents and other

     —        78      —        78
                           

Total assets

   $ 802    $ 503    $ 1    $ 1,306
                           

Liabilities

           

Derivatives

           

Commodity

   $ —      $ 14    $ 16    $ 30
                           

Total liabilities

   $ —      $ 14    $ 16    $ 30
                           

As of December 31, 2009

           

Assets

           

Derivatives:

           

Commodity

   $ —      $ 30    $ 2    $ 32

Interest rate

     —        86      —        86

Foreign currency

     —        2      —        2

Investments:

           

Marketable equity securities

     634      —        —        634

Marketable debt securities:

           

Corporate bonds

     —        161      —        161

U.S. Treasury securities and agency debentures

     90      8      —        98

State and municipal

     —        189      —        189

Other

     —        3      —        3

Cash equivalents and other

     —        16      —        16
                           

Total assets

   $ 724    $ 495    $ 2    $ 1,221
                           

Liabilities

           

Derivatives:

           

Commodity

   $ —      $ 3    $ 12    $ 15
                           

Total liabilities

   $ —      $ 3    $ 12    $ 15
                           

 

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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,
 
     2010     2009  
(millions)             

Beginning balance

   $ (10   $ (69

Total realized and unrealized gains (losses):

    

Included in earnings

     21       (51

Included in regulatory assets/liabilities

     (5     23  

Purchases, issuances and settlements

     (21     54  

Transfers out of Level 3

     —          2  
                

Ending balance

   $ (15   $ (41
                

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

   $ —        $ 3  
                

The gains and losses included in earnings in the Level 3 fair value category, including those attributable to the change in unrealized gains and losses relating to assets still held at the reporting date, were classified in electric fuel and other energy-related purchases expense in Virginia Power’s Consolidated Statements of Income for the three months ended March 31, 2010 and 2009.

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. Dominion’s and Virginia Power’s financial instruments’ carrying amounts and fair values are as follows:

 

     March 31, 2010    December 31, 2009
     Carrying
Amount
   Estimated  Fair
Value(1)
   Carrying
Amount
   Estimated  Fair
Value(1)
(millions)                    

Dominion

           

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

   $ 14,867    $ 16,119    $ 14,867    $ 15,970

Junior subordinated notes payable to affiliates

     268      255      268      255

Enhanced junior subordinated notes

     1,483      1,549      1,483      1,487

Subsidiary preferred stock(3 )

     257      245      257      251
                           

Virginia Power

           

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

   $ 6,456    $ 7,062    $ 6,458    $ 6,977

Preferred stock(3 )

     257      245      257      251
                           

 

(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 amounts which represent the unamortized discount and premium. At March 31, 2010 and December 31, 2009, includes the valuation of certain fair value hedges associated with Dominion’s fixed rate debt of approximately $24 million and $23 million, respectively. At March 31, 2010, includes the valuation of certain fair value hedges associated with Virginia Power’s fixed rate debt of approximately $1 million.
(3) Includes issuance expenses of $2 million at March 31, 2010 and December 31, 2009.

 

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Note 10. 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, 2009. See Note 9 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, 2010. 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 deals, 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)

     637.6      150.9

Basis

     1,259.8      494.7

Electricity (MWh):

     

Fixed price( 1)

     20,459,482      9,515,954

FTRs

     20,005,587      3,056,425

Capacity (MW)

     1,394,432      4,821,200

Liquids (gallons)( 2)

     152,964,000      103,152,000

Interest rate

   $ 1,100,000,000    $ 825,000,000

Foreign currency (euros)

     4,000,000      —  

 

(1) Includes options.
(2) Includes NGL and oil derivatives.

For the three months ended March 31, 2010 and 2009, gains or losses on hedging instruments determined to be ineffective 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 and were not material for the three months ended March 31, 2010 and 2009.

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, 2010:

 

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

Commodities:

      

Gas

   $ (19   $ (11 )   39 months

Electricity

     326       266      38 months

Other

     4       —        62 months

Interest rate

     76       (3 )   369 months
                    

Total

   $ 387     $ 252     
                  

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, interest rates and foreign exchange rates.

The sale of the majority of Dominion’s remaining E&P operations resulted in the discontinuance of hedge accounting for certain cash flow hedges, as discussed in Note 3.

In addition, changes to Dominion’s financing needs resulted in the discontinuance of hedge accounting for certain cash flow hedges since it became probable that forecasted interest payments would not occur. In connection with the discontinuance of hedge accounting for these contracts, Dominion recognized a benefit recorded to interest and related charges reflecting the reclassification of gains from AOCI to earnings of $40 million ($23 million after-tax) in the three months ended March 31, 2010.

 

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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, 2010

        

ASSETS

        

Current Assets

        

Commodity

   $ 655    $ 879    $ 1,534

Interest rate

     23      81      104
                    

Total current derivative assets

     678      960      1,638
                    

Noncurrent Assets

        

Commodity

     155      125      280

Interest rate

     3      —        3
                    

Total noncurrent derivative assets(1)

     158      125      283
                    

Total derivative assets

   $ 836    $ 1,085    $ 1,921
                    

LIABILITIES

        

Current Liabilities

        

Commodity

   $ 238    $ 888    $ 1,126
                    

Total current derivative liabilities

     238      888      1,126
                    

Noncurrent Liabilities

        

Commodity

     65      141      206
                    

Total noncurrent derivative liabilities(2)

     65      141      206
                    

Total derivative liabilities

   $ 303    $ 1,029    $ 1,332
                    

December 31, 2009

        

ASSETS

        

Current Assets

        

Commodity

   $ 445    $ 507    $ 952

Interest rate

     174      —        174

Foreign currency

     2      —        2
                    

Total current derivative assets

     621      507      1,128
                    

Noncurrent Assets

        

Commodity

     132      100      232

Interest rate

     2      —        2
                    

Total noncurrent derivative assets(1)

     134      100      234
                    

Total derivative assets

   $ 755    $ 607    $ 1,362
                    

LIABILITIES

        

Current Liabilities

        

Commodity

   $ 147    $ 532    $ 679
                    

Total current derivative liabilities

     147      532      679
                    

Noncurrent Liabilities

        

Commodity

     61      120      181

Interest rate

     1      —        1
                    

Total noncurrent derivative liabilities(2)

     62      120      182
                    

Total derivative liabilities

   $ 209    $ 652    $ 861
                    

 

(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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Table of Contents

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, 2010

      

Derivative Type and Location of Gains (Losses)

      

Commodity:

      

Operating revenue

     $ 181    

Purchased gas

       (97  

Electric fuel and other energy-related purchases

       (3  

Purchased electric capacity

       1    
                        

Total commodity

   $ 299       82     $ (13
                        

Interest rate(3)

     (3     40       (1

Foreign currency(4)

     —          1       (1
                        

Total

   $ 296     $ 123     $ (15
                        

Three Months Ended March 31, 2009

      

Derivative Type and Location of Gains (Losses)

      

Commodity:

      

Operating revenue

     $ 238    

Purchased gas

       (48  

Electric fuel and other energy-related purchases

       (5  

Purchased electric capacity

       2    
                        

Total commodity

   $ 431        187     $ 11  
                        

Interest rate(3)

     (14     (1     11  

Foreign currency(4)

     —          1       (2
                        

Total

   $ 417      $ 187     $ 20  
                        

 

(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.
(4) Amounts recorded in Dominion’s Consolidated Statements of Income are classified in electric fuel and other energy-related purchases.

 

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Derivatives not designated as hedging instruments

   Amount of Gain (Loss) Recognized in Income
on Derivatives(1)
 
   Three Months Ended
March  31, 2010
    Three Months Ended
March 31, 2009
 
(millions)             

Derivative Type and Location of Gains (Losses)

    

Commodity:

    

Operating revenue

   $ 40     $ 33  

Purchased gas

     (31     (32

Electric fuel and other energy-related purchases

     21       (51
                

Total

   $ 30     $ (50
                
(1) Includes derivative activity amortized out of regulatory assets/liabilities. Amounts deferred into regulatory assets/liabilities have no associated effect in Dominion’s Consolidated Statements of Income.

Virginia Power

The following table presents the volume of Virginia Power’s derivative activity as of March 31, 2010. 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 deals, for which they represent the absolute value of the net volume of their long and short positions.

 

     Current    Noncurrent

Natural Gas (bcf):

     

Fixed price

     8.9      —  

Basis

     4.4      —  

Electricity (MWh):

     

Fixed price

     497,600      —  

FTRs

     19,320,930      3,056,425

Capacity (MW)

     447,882      256,200

Interest rate

   $ 550,000,000    $ 75,000,000

Foreign currency (euros)

     4,000,000      —  

For the three months ended March 31, 2010 and 2009, gains or losses on hedging instruments determined to be ineffective 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 and were not material for the three months ended March 31, 2010 and 2009.

The following table presents selected information related to gains on cash flow hedges included in AOCI in Virginia Power’s Consolidated Balance Sheet at March 31, 2010:

 

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

Interest rate

   $ 7    $ —      365 months

Other

     1      1    44 months
                  

Total

   $ 8    $ 1   
                  

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, interest rates and foreign exchange 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 Virginia Power’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, 2010

        

ASSETS

        

Current Assets

        

Commodity

   $ 21    $ 1    $ 22

Interest rate

     4      64      68
                    

Total current derivative assets(1)

     25      65      90
                    

Noncurrent Assets

        

Commodity

     4      —        4

Interest rate

     1      —        1
                    

Total noncurrent derivative assets(2 )

     5      —        5
                    

Total derivative assets

   $ 30    $ 65    $ 95
                    

LIABILITIES

        

Current Liabilities

        

Commodity

   $ 12    $ 16    $ 28
                    

Total current derivative liabilities(3 )

     12      16      28
                    

Noncurrent Liabilities

        

Commodity

     2      —        2
                    

Total noncurrent derivative liabilities( 4)

     2      —        2
                    

Total derivative liabilities

   $ 14    $ 16    $ 30
                    

December 31, 2009

        

ASSETS

        

Current Assets

        

Commodity

   $ 20    $ 2    $ 22

Interest rate

     86      —        86

Foreign currency

     2      —        2
                    

Total current derivative assets(1)

     108      2      110
                    

Noncurrent Assets

        

Commodity

     10      —        10
                    

Total noncurrent derivative assets( 2)

     10      —        10
                    

Total derivative assets

   $ 118    $ 2    $ 120
                    

LIABILITIES

        

Current Liabilities

        

Commodity

   $ 1    $ 12    $ 13
                    

Total current derivative liabilities( 3)

     1      12      13
                    

Noncurrent Liabilities

        

Commodity

     2      —        2
                    

Total noncurrent derivative liabilities( 4)

     2      —        2
                    

Total derivative liabilities

   $ 3    $ 12    $ 15
                    

 

(1) Current derivative assets are presented in other current assets in Virginia Power’s Consolidated Balance Sheets.
(2) Noncurrent derivative assets are presented in other deferred charges and other assets in Virginia Power’s Consolidated Balance Sheets.
(3) Current derivative liabilities are presented in other current liabilities in Virginia Power’s Consolidated Balance Sheets.
(4) Noncurrent derivative liabilities are presented in other deferred credits and other liabilities in Virginia Power’s Consolidated Balance Sheets.

 

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Table of Contents

The following tables present the gains and losses on Virginia Power’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, 2010

      

Derivative Type and Location of Gains (Losses)

      

Commodity:

      

Electric fuel and other energy-related purchases

     $ (1  

Purchased electric capacity

       1    
                        

Total commodity

   $ (3     —        $ (13
                        

Interest rate(3)

     (1     3       (1

Foreign currency(4)

     —          —          (1
                        

Total

   $ (4   $ 3     $ (15
                        

Three Months Ended March 31, 2009

      

Derivative Type and Location of Gains (Losses)

      

Commodity:

      

Electric fuel and other energy-related purchases

     $ (5  

Purchased electric capacity

       2    
                        

Total commodity

   $ (1     (3   $ 11  
                        

Interest rate(3)

     (2     —          11  

Foreign currency(4)

     —          —          (2
                        

Total

   $ (3   $ (3   $ 20  
                        

 

(1) Amounts deferred into AOCI have no associated effect in Virginia Power’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 Virginia Power’s Consolidated Statements of Income.
(3) Amounts recorded in Virginia Power’s Consolidated Statements of Income are classified in interest and related charges.
(4) Amounts recorded in Virginia Power’s Consolidated Statements of Income are classified in electric fuel and other energy-related purchases.

 

Derivatives not designated as hedging instruments

   Amount of Gain (Loss) Recognized in Income
on Derivatives(1)
 
   Three Months Ended
March  31, 2010
   Three Months Ended
March 31, 2009
 
(millions)            

Derivative Type and Location of Gains (Losses)(2 )

     

Commodity

   $ 21    $ (51
               

Total

   $ 21    $ (51
               

 

(1) Includes derivative activity amortized out of regulatory assets/liabilities. Amounts deferred into regulatory assets/liabilities have no associated effect in Virginia Power’s Consolidated Statements of Income.
(2) Amounts are recorded in electric fuel and other energy-related purchases in Virginia Power’s Consolidated Statements of Income.

 

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Note 11. Investments

Dominion

Rabbi Trust Securities

Marketable equity and debt securities and cash equivalents held in Dominion’s rabbi trusts and classified as trading totaled $95 million and $96 million at March 31, 2010 and December 31, 2009, respectively. Cost method investments held in Dominion’s rabbi trusts totaled $18 million and $17 million at March 31, 2010 and December 31, 2009, respectively.

Decommissioning Trust Securities

Dominion holds marketable equity and debt securities and cash equivalents (classified as available-for-sale) and cost method investments in nuclear decommissioning trust funds to fund future decommissioning costs for its nuclear plants. Dominion’s decommissioning trust funds are summarized below.

 

     Amortized
Cost
   Total
Unrealized
Gains(1)
   Total
Unrealized
Losses(1)
    Fair
Value
(millions)                     

March 31, 2010

          

Marketable equity securities

   $ 1,224    $ 390    $ —        $ 1,614

Marketable debt securities:

          

Corporate bonds

     335      20      (1     354

U.S. Treasury securities and agency debentures

     426      13      (1     438

State and municipal

     158      9      (2     165

Other

     14      —        —          14

Cost method investments

     100      —        —          100

Cash equivalents and other(2)

     50      —        —          50
                            

Total

   $ 2,307    $ 432    $ (4 )(3)    $ 2,735
                            

December 31, 2009

          

Marketable equity securities

   $ 1,191    $ 338    $ —        $ 1,529

Marketable debt securities:

          

Corporate bonds

     241      13      (1     253

U.S. Treasury securities and agency debentures

     281      13      (1     293

State and municipal

     371      21      (3     389

Other

     4      —        —          4

Cost method investments

     97      —        —          97

Cash equivalents and other(2)

     60      —        —          60
                            

Total

   $ 2,245    $ 385    $ (5 )(3)    $ 2,625
                            

 

(1) Included in AOCI and the decommissioning trust regulatory liability.
(2) At March 31, 2010 and December 31, 2009, reflects ($59) million and $11 million, respectively, related to net pending sales and purchases of securities.
(3) The fair value of securities in an unrealized loss position was $275 million and $169 million at March 31, 2010 and December 31, 2009, respectively.

The fair value of Dominion’s marketable debt securities (classified as available for sale) at March 31, 2010 by contractual maturity is as follows:

 

     Amount
(millions)     

Due in one year or less

   $ 86

Due after one year through five years

     340

Due after five years through ten years

     244

Due after ten years

     301
      

Total

   $ 971
      

 

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Table of Contents

Presented below is selected information regarding Dominion’s marketable equity and debt securities.

 

     Three Months Ended
March  31,
 
     2010    2009  
(millions)            

Trading securities:

     

Net unrealized gain (loss)

   $ 2    $ (4

Available-for-sale securities:

     

Proceeds from sales(1)

     513      289  

Realized gains(2)

     55      17  

Realized losses(2)

     11      143  

 

(1) The increase in proceeds primarily reflects changes in asset allocation and liquidation of positions in connection with changes in fund managers.
(2) Includes realized gains or losses recorded to the decommissioning trust regulatory liability.

Dominion recorded other-than-temporary impairment losses on investments as follows:

 

     Three Months Ended
March  31,
 
     2010     2009  
(millions)             

Total other-than-temporary impairment losses(1)

   $ 7     $ 141  

Losses recorded to decommissioning trust regulatory liability

     (3     (63

Losses recognized in other comprehensive income (before taxes)

     (1     —     
                

Net impairment losses recognized in earnings

   $ 3     $ 78  
                

 

(1) Amount includes other-than-temporary impairment losses for debt securities of $2 million and $6 million for the three months ended March 31, 2010 and 2009, respectively.

 

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Virginia Power

Decommissioning Trust Securities

Virginia Power holds marketable equity and debt securities and cash equivalents (classified as available-for-sale) and cost method investments in nuclear decommissioning trust funds to fund future decommissioning costs for its nuclear plants. Virginia Power’s decommissioning trust funds are summarized below.

 

     Amortized
Cost
   Total
Unrealized
Gains(1)
   Total
Unrealized
Losses(1)
    Fair
Value
(millions)                     

March 31, 2010

          

Marketable equity securities

   $ 512    $ 157    $ —        $ 669

Marketable debt securities:

          

Corporate bonds

     231      8      —          239

U.S. Treasury securities and agency debentures

     183      3      (1     185

State and municipal

     31      2      —          33

Other

     7      —        —          7

Cost method investments

     100      —        —          100

Cash equivalents and other(2)

     18      —        —          18
                            

Total

   $ 1,082    $ 170    $ (1 )(3)    $ 1,251
                            

December 31, 2009

          

Marketable equity securities

   $ 499    $ 135    $ —        $ 634

Marketable debt securities:

          

Corporate bonds

     153      9      (1     161

U.S. Treasury securities and agency debentures

     95      3      —          98

State and municipal

     181      9      (1     189

Other

     3      —        —          3

Cost method investments

     97      —        —          97

Cash equivalents and other(2)

     22      —        —          22
                            

Total

   $ 1,050    $ 156    $ (2 )(3)    $ 1,204
                            

 

(1) Included in AOCI and the decommissioning trust regulatory liability.
(2) At March 31, 2010 and December 31, 2009, reflects ($60) million and $6 million, respectively, related to net pending sales and purchases of securities.
(3) The fair value of securities in an unrealized loss position was $144 million and $88 million at March 31, 2010, and December 31, 2009, respectively.

The fair value of Virginia Power’s marketable debt securities at March 31, 2010, by contractual maturity is as follows:

 

     Amount
(millions)     

Due in one year or less

   $ 12

Due after one year through five years

     190

Due after five years through ten years

     134

Due after ten years

     128
      

Total

   $ 464
      

 

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Presented below is selected information regarding Virginia Power’s marketable equity and debt securities.

 

     Three Months Ended
March  31,
     2010    2009
(millions)          

Proceeds from sales(1)

   $ 304    $ 137

Realized gains( 2)

     28      8

Realized losses( 2)

     4      64

 

(1) The increase in proceeds primarily reflects changes in asset allocation and liquidation of positions in connection with changes in fund managers.
(2) Includes realized gains or losses recorded to the decommissioning trust regulatory liability.

Virginia Power recorded other-than-temporary impairment losses on investments as follows:

 

     Three Months Ended
March  31,
 
     2010     2009  
(millions)             

Total other-than-temporary impairment losses(1)

   $ 3     $ 87  

Losses recorded to decommissioning trust regulatory liability

     (3     (63

Losses recognized in other comprehensive income (before taxes)

     —          —     
                

Net impairment losses recognized in earnings

   $ —        $ 24  
                

 

(1) Amount includes other-than-temporary impairment losses for debt securities of $1 million and $4 million for the three months ended March 31, 2010 and 2009, respectively.

Note 12. Regulatory Matters

Other than the following matters, there have been no significant developments regarding the pending regulatory matters disclosed in Note 14 to the Consolidated Financial Statements in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2009.

Approval of Virginia Power Rate Settlement

In February 2010, Virginia Power filed a revised Stipulation and Recommendation with the Virginia Commission, which had the support of all of the interested parties, including the Staff of the Virginia Commission. The Companies’ fourth quarter 2009 results included a charge reflecting their best estimate of the probable outcome of this matter. In March 2010, the Virginia Commission approved the revised Stipulation and Addendum (Settlement Approval Order) that concluded Virginia Power’s base rate review and resolved open issues relating to Virginia Power’s fuel factor and Rider T. An ROE issue relating to Riders R, S, C1 and C2 was also resolved.

The Settlement Approval Order includes the following provisions:

Credits from 2008 Revenues

 

 

Credits to customers of $400 million from Virginia Power’s 2008 revenues to be applied against base rates and rider charges.

Base Rates

 

 

No change in Virginia Power’s base rates in existence prior to September 1, 2009 until December 1, 2013 (unless emergency rate relief is warranted by statute);

 

 

Refund increased revenues collected under the interim base rates since September 1, 2009; and

 

 

An ROE of 11.9% (inclusive of a performance incentive of 60 basis points) for use in the Virginia Commission’s assessment in the 2011 biennial rate review of Virginia Power’s earnings in 2009 and 2010.

 

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FTR Credits

 

 

Credits to customers of $129 million, inclusive of any carrying charge, relating to revenues from FTRs for the period July 1, 2007 through June 30, 2009.

Generation Riders R and S

 

 

An ROE of 12.3% (inclusive of a 100 basis point statutory enhancement) for the 2010 rate year.

Transmission Rider T

 

 

Waiver of recovery, effective January 1, 2011, of deferred RTO start-up and administrative costs in the amount of $197 million (including carrying charges) that were previously approved for recovery through Rider T.

DSM Riders C1 and C2

 

 

An ROE of 11.3% for the 2010 rate year pending approval of the riders.

Approval of DSM Programs Riders C1 and C2

Virginia Power previously filed with the Virginia Commission an application for approval and cost recovery of eleven DSM programs, including one peak-shaving program and ten energy efficiency programs. In March 2010, the Virginia Commission approved the recovery of approximately $28 million for five of the DSM programs through initiation of Riders C1 and C2, effective May 1, 2010. The riders will increase the typical 1,000 kWh Virginia jurisdictional residential customer’s bill by approximately $0.53 per month. With respect to the other six DSM programs for which approval was sought, the Virginia Commission made a finding that they were not in the public interest at this time, but allowed Virginia Power the opportunity for further evaluation of similar programs.

Ohio PIPP Rider

Under the Ohio PIPP, eligible customers can receive energy assistance based on their ability to pay their bill. The difference between the customer’s total bill and the PIPP plan amount is deferred and collected under the PIPP rider according to Dominion East Ohio tariff provisions. Although the current rider rate was designed to recover deferred costs over a three year period, unrecovered costs have increased. Accordingly, in December 2009, Dominion East Ohio filed for approval of an increase in the recovery rate. In March 2010, the Ohio Commission approved a 12-month recovery rider rate of $1.7078/mcf, which went into effect in April 2010. The Ohio Commission directed Dominion East Ohio to file an application, with arrearages calculated on a calendar year basis, to update its PIPP rider within one year of implementation of the new PIPP rider rate and annually thereafter. As a result of the Ohio Commission’s ruling, Dominion reclassified $143 million of previously deferred costs to be recovered through the PIPP rider from noncurrent regulatory assets to current regulatory assets.

Federal Energy Regulatory Commission

In March 2010, ODEC and NCEMC filed a complaint against Virginia Power at FERC claiming that approximately $223 million in transmission costs related to specific projects were unjust, unreasonable and unduly discriminatory or preferential and should be excluded from Virginia Power’s transmission formula. ODEC and NCEMC requested that FERC establish procedures to determine the amount of costs for each applicable project that should be excluded from Virginia Power’s rates. Virginia Power cannot predict the outcome of this proceeding.

North Anna Power Station

Virginia Power is considering the construction of a third nuclear unit at a site located at North Anna, which Virginia Power owns along with ODEC. Virginia Power and ODEC have obtained an Early Site Permit for the North Anna site from the NRC. In November 2007, Virginia Power, along with ODEC, filed an application with the NRC for a COL that references a specific reactor design and which would allow Virginia Power to build and operate a new nuclear unit at North Anna. In January 2008, the NRC accepted Virginia Power’s application for the COL and deemed it complete. In December 2008, Virginia Power terminated a long-lead agreement with its vendor with respect to the reactor design identified in its COL application and certain related equipment. A competitive process was initiated in 2009 to determine if vendors can provide an advanced technology reactor that could be licensed and built under terms acceptable to Virginia Power. Virginia Power has a cooperative agreement, scheduled to terminate September 30, 2010, with the Department of Energy to share equally the cost of developing a COL that references a specific reactor technology; however, this agreement may not remain in effect going forward if there is a change to the reactor technology to be used. Any change in reactor design will also require Virginia Power to amend its COL application, as necessary. Virginia Power has not yet committed to building a new nuclear unit.

 

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The NRC is required to conduct a hearing in all COL proceedings. In August 2008, the Atomic Safety and Licensing Board of the NRC granted a request for a hearing on one of eight contentions filed by the Blue Ridge Environmental Defense League. In August 2009, the Atomic Safety and Licensing Board dismissed this contention as moot, but in November 2009 admitted a new contention filed by Blue Ridge Environmental Defense League. Virginia Power’s motion for reconsideration of this ruling was denied by the Atomic Safety and Licensing Board in March 2010. Absent additional contentions, the mandatory NRC hearing will be uncontested with respect to other issues. In March 2010, the NRC completed its final supplemental environmental impact statement, finding that there are no environmental impacts that would preclude issuing a combined license for construction and operation for the new nuclear unit. The final safety evaluation report, including recommendations by the NRC Advisory Committee on Reactor Safeguards, is currently scheduled for early 2011. However, if Virginia Power amends its COL application to change its reactor design, further safety and environmental review is expected.

Note 13. Variable Interest Entities

As discussed in Note 16 to the Consolidated Financial Statements in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2009, certain variable pricing terms in some of the Companies’ long-term power and capacity contracts cause them to be considered variable interests in the counterparties.

Virginia Power has long-term power and capacity contracts with four non-utility generators with an aggregate generation capacity of approximately 940 MW. These contracts contain certain variable pricing mechanisms in the form of partial fuel reimbursement that Virginia Power considers to be variable interests. After an evaluation of the information provided by these entities, Virginia Power was unable to determine whether they were VIEs. However, the information they provided, as well as Virginia Power’s knowledge of generation facilities in Virginia, enabled Virginia Power to conclude that, if they were VIEs, it would not be the primary beneficiary. This conclusion reflects Virginia Power’s determination that its variable interests do not convey the power to direct the most significant activities that impact the economic performance of the entity during the remaining terms of Virginia Power’s contracts and for the years the entities are expected to operate after its contractual relationships expire. The contracts expire at various dates ranging from 2015 to 2021. Virginia Power is not subject to any risk of loss from these potential VIEs other than its remaining purchase commitments which totaled $1.7 billion as of March 31, 2010. Virginia Power paid $54 million and $53 million for electric capacity to these entities for the three months ended March 31, 2010 and 2009, respectively. Virginia Power paid $41 million for electric energy to these entities in both the three months ended March 31, 2010 and 2009.

Virginia Power purchased shared services from DRS, an affiliated VIE, of approximately $141 million and $100 million for the three months ended March 31, 2010 and 2009, respectively. Virginia Power determined that it is not the most closely associated entity with DRS and therefore not the primary beneficiary. DRS provides accounting, legal, finance and certain administrative and technical services to all Dominion subsidiaries, including Virginia Power. Virginia Power has no obligation to absorb more than its allocated share of DRS costs.

Note 14. Significant Financing Transactions

Credit Facilities and Short-Term Debt

Dominion and Virginia Power use short-term debt to fund working capital requirements, as a bridge to long-term debt financing and as bridge financing for acquisitions, if applicable. 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 addition, Dominion utilizes cash and letters of credit to fund collateral requirements under its commodities hedging program. Collateral requirements are impacted by commodity prices, hedging levels, Dominion’s credit quality and the credit quality of its counterparties.

 

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At March 31, 2010, commercial paper, bank loans, and letters of credit outstanding, as well as capacity available under credit facilities were as follows:

 

     Facility
Limit
   Outstanding
Commercial
Paper
   Outstanding
Bank
Borrowings
   Outstanding
Letters of
Credit
   Facility
Capacity
Available
(millions)                         

Five-year joint revolving credit facility(1)

   $ 2,872    $ —      $ —      $ 163    $ 2,709

Five-year Dominion credit facility(2)

     1,700      295      —        8      1,397

Five-year Dominion bilateral facility(3)

     200      —        —        35      165
                                  

Totals

   $ 4,772    $ 295    $ —      $ 206    $ 4,271
                                  

 

(1) This credit facility was entered into in February 2006 and terminates in February 2011. This credit facility can be used to support bank borrowings and the issuance of commercial paper, as well as to support up to $1.5 billion of letters of credit.
(2) This credit facility was entered into in August 2005 and terminates in August 2010. This credit facility can be used to support bank borrowings, commercial paper and letter of credit issuances.
(3) This facility was entered into in December 2005 and terminates in December 2010. This facility can be used to support bank borrowings, commercial paper and letter of credit issuances.

In addition to the credit facility commitments disclosed above, Virginia Power also has a five-year $120 million credit facility that terminates in February 2011, which supports certain of its tax-exempt financings.

Dominion and Virginia Power plan to replace their existing credit facilities during the third quarter of 2010. They expect to operate with credit facilities ranging from $3.0 to $3.5 billion. The Companies do not expect the reduction in the size of their credit facilities to negatively impact their ability to fund their operations.

Convertible Securities

At March 31, 2010, Dominion had $202 million of outstanding contingent convertible senior notes that are convertible by holders into a combination of cash and shares of Dominion’s common stock under certain circumstances. The conversion feature requires that the principal amount of each note be repaid in cash, while amounts payable in excess of the principal amount will be paid in common stock. The conversion rate is subject to adjustment upon certain events such as subdivisions, splits, combinations of common stock or the issuance to all common stock holders of certain common stock rights, warrants or options and certain dividend increases. As of March 31, 2010, the conversion rate has been adjusted, primarily due to individual dividend payments above the level paid at issuance, to 28.2239 shares of common stock per $1,000 principal amount of senior notes, which represents a conversion price of $35.43.

As of December 31, 2009, the closing price of Dominion’s common stock was not equal to $42.67 per share or higher for at least 20 out of the last 30 consecutive trading days. Therefore, the senior notes were not eligible for conversion during the first quarter of 2010. As of March 31, 2010, the closing price of Dominion’s common stock was not equal to $42.52 per share or higher for at least 20 out of the last 30 consecutive trading days; therefore, the senior notes are not eligible for conversion during the second quarter of 2010.

Issuance of Common Stock

During the three months ended March 31, 2010, Dominion issued 0.8 million shares of common stock and received cash proceeds of $27 million. The shares issued and cash proceeds received during the three months ended March 31, 2010 were through Dominion Direct®, employee savings plans and the exercise of employee stock options. In February 2010, Dominion began purchasing its common stock on the open market with proceeds received through Dominion Direct® and employee savings plans, rather than issuing additional new common shares.

In March 2010, Virginia Power issued 14,600 shares of its common stock to Dominion reflecting the conversion of approximately $433 million of short-term demand note borrowings from Dominion to equity.

Repurchase of Common Stock

In March 2010, Dominion began repurchasing shares on the open market in anticipation of proceeds from the pending sale of its Appalachian E&P operations. During the three months ended March 31, 2010, Dominion repurchased 4.7 million shares of its common stock for approximately $191 million. As of April 29, 2010, Dominion had repurchased an additional 6.1 million shares of its common stock for approximately $254 million.

 

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Note 15. Commitments and Contingencies

Other than the following matters, there have been no significant developments regarding the commitments and contingencies disclosed in Note 23 to the Consolidated Financial Statements in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2009.

Workforce Reduction Program

In the first quarter of 2010, Dominion and Virginia Power announced a workforce reduction program that is expected to reduce their total workforces by approximately 9% and 11%, respectively, during 2010. The goal of the workforce reduction program is to reduce operations and maintenance expense growth and further improve the efficiency of the Companies. Dominion and Virginia Power did not eliminate positions that would compromise safety, reliability or their ability to comply with applicable laws and regulations. In the first quarter of 2010, Dominion recorded a $338 million ($206 million after-tax) charge, including $202 million ($123 million after-tax) at Virginia Power, primarily reflected in other operations and maintenance expense in their Consolidated Statements of Income due to severance pay and other benefits related to the workforce reduction program.

Guarantees

Dominion

At March 31, 2010, Dominion had issued $127 million of guarantees to support third parties and equity method investees (issued guarantees). No significant amounts related to these guarantees have been recorded. During the first quarter of 2010, Dominion’s $165 million limited-scope guarantee and indemnification for one-half of NedPower’s project-level financing relating to litigation seeking to halt the NedPower wind farm was formally terminated with the consent of NedPower’s lenders as a result of the dismissal by the applicable court of such litigation pursuant to an agreed dismissal order. Issued guarantees include $57 million of guarantees to support Dominion’s investment in a joint venture with BP to develop Fowler Ridge. As of March 31, 2010, Dominion’s exposure under these guarantees was $22 million, primarily related to certain reserve requirements associated with Fowler Ridge’s non-recourse financing. BP has provided identical guarantees for the other one-half of these joint venture commitments.

Dominion also enters into guarantee arrangements on behalf of its consolidated subsidiaries, primarily to facilitate their commercial transactions with third parties. To the extent that a liability subject to a guarantee has been incurred by one of Dominion’s consolidated subsidiaries, that liability is included in Dominion’s Consolidated Financial Statements. Dominion is not required to recognize liabilities for guarantees issued on behalf of its subsidiaries unless it becomes probable that it will have to perform under the guarantees. Dominion currently believes it is unlikely that it would be required to perform or otherwise incur any losses associated with guarantees of its subsidiaries’ obligations.

 

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At March 31, 2010, Dominion had issued the following subsidiary guarantees:

 

     Stated Limit    Value(1)
(millions)          

Subsidiary debt(2)

   $ 126    $ 126

Commodity transactions(3)

     2,915      229

Lease obligation for power generation facility(4)

     811      811

Nuclear obligations(5)

     231      60

Other( 6 )

     494      140
             

Total

   $ 4,577    $ 1,366
             

 

(1) Represents the estimated portion of the guarantee’s stated limit that is utilized as of March 31, 2010 based upon prevailing economic conditions and fact patterns specific to each guarantee arrangement. For those guarantees related to obligations that are recorded as liabilities by Dominion’s subsidiaries, the value includes the recorded amount.
(2) Guarantees of debt of certain DEI subsidiaries. In the event of default by the subsidiaries, Dominion would be obligated to repay such amounts.
(3) Guarantees related to energy trading and marketing activities and other commodity commitments of certain subsidiaries, including subsidiaries of Virginia Power and DEI. These guarantees were provided to counterparties in order to facilitate physical and financial transactions in gas, oil, electricity, pipeline capacity, transportation and related commodities and services. If any of these subsidiaries fail to perform or pay under the contracts and the counterparties seek performance or payment, Dominion would be required to satisfy such obligation. Dominion and its subsidiaries receive similar guarantees as collateral for credit extended to others.
(4) Guarantee of a DEI subsidiary’s leasing obligation for Fairless.
(5) Guarantees related to certain DEI subsidiaries’ potential retrospective premiums that could be assessed if there is a nuclear incident under Dominion’s nuclear insurance programs and guarantees for a DEI subsidiary’s and Virginia Power’s commitment to buy nuclear fuel. Excludes Dominion’s agreement to provide up to $150 million and $60 million to two DEI subsidiaries to pay the operating expenses of Millstone and Kewaunee nuclear power stations, respectively, in the event of a prolonged outage, as part of satisfying certain NRC requirements concerned with ensuring adequate funding for the operations of nuclear power stations.
(6) Guarantees related to other miscellaneous contractual obligations such as leases, environmental obligations and construction projects. Also includes guarantees related to certain DEI subsidiaries’ obligations for equity capital contributions and energy generation associated with the wind farm projects.

Virginia Power

As of March 31, 2010, Virginia Power had issued $16 million of guarantees primarily to support tax-exempt debt issued through conduits.

Surety Bonds and Letters of Credit

As of March 31, 2010, Dominion had purchased $94 million of surety bonds, including $39 million at Virginia Power, and authorized the issuance of standby letters of credit by financial institutions of $206 million, including $103 million at Virginia Power, to facilitate commercial transactions by its subsidiaries with third parties. Under the terms of the surety bonds, the Companies are obligated to indemnify the respective surety bond company for any amounts paid.

Environmental Matters

In December 2009, the EPA issued, Final Endangerment and Cause or Contribute Findings for Greenhouse Gases Under Section 202(a) of the Clean Air Act, finding that GHGs “endanger both the public health and the public welfare of current and future generations.” In April 2010, the EPA and the U.S. Department of Transportation issued final rules that will reduce GHG emissions and improve fuel economy for new cars and trucks sold in the U.S. These rules, when effective, will establish GHG emissions as regulated pollutants under the Clean Air Act. Dominion and Virginia Power expect that beginning in 2011, they will be required to obtain permits for GHG emissions from new and modified facilities. Until these actions occur, and the EPA establishes guidance for GHG permitting, including best available control technology, it is not possible to determine the impact on Dominion’s or Virginia Power’s facilities that emit GHGs.

 

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Note 16. Credit Risk

Credit risk is the risk of financial loss if counterparties fail to perform their contractual obligations. In order to minimize overall credit risk, credit policies are maintained, including the evaluation 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. Dominion and Virginia Power maintain a provision for credit losses based on factors surrounding the credit risk of their customers, historical trends and other information. Management believes, based on credit policies and the provision for credit losses, that it is unlikely that a material adverse effect on financial position, results of operations or cash flows would occur as a result of counterparty nonperformance.

Dominion

As a diversified energy company, Dominion transacts primarily with major companies in the energy industry and with commercial and residential energy consumers. These transactions principally occur in the Northeast, mid-Atlantic and Midwest regions of the U.S. and Texas. Dominion does not believe that this geographic concentration contributes significantly to its overall exposure to credit risk. In addition, as a result of its large and diverse customer base, Dominion is not exposed to a significant concentration of credit risk for receivables arising from electric and gas utility operations.

Dominion’s exposure to credit risk is concentrated primarily within its energy marketing and price risk management activities, as Dominion transacts 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 commodities, marketing of merchant generation output, structured transactions 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 netting rights. Gross credit exposure is calculated prior to the application of collateral. At March 31, 2010, Dominion’s gross credit exposure totaled $1 billion. After the application of collateral, credit exposure is reduced to $851 million. Of this amount, investment grade counterparties, including those internally rated, represented 92%. Two counterparty exposures are greater than 10% of Dominion’s total exposure, one representing 13% and the other 12%, both of which are large financial institutions rated investment grade.

The majority of Dominion’s derivative instruments contain credit-related contingent provisions. These provisions require Dominion to provide collateral upon the occurrence of specific events, primarily a credit downgrade. If the credit-related contingent features underlying these instruments that are in a liability position and not fully collateralized with cash were fully triggered as of March 31, 2010 and December 31, 2009, Dominion would have been required to post an additional $70 million and $36 million, respectively, of collateral to its counterparties. The collateral that would be required to be posted includes the impacts of any offsetting asset positions and any amounts already posted for derivatives, non-derivative contracts and derivatives elected under the normal purchases and normal sales exception, per contractual terms. Dominion had posted $77 million in collateral, including $40 million of letters of credit at March 31, 2010 and $62 million in collateral, including $48 million of letters of credit at December 31, 2009, related to derivatives with credit-related contingent provisions that are in a liability position and not fully collateralized with cash. The collateral posted includes any amounts paid related to non-derivative contracts and derivatives elected under the normal purchases and normal sales exception, per contractual terms. The aggregate fair value of all derivative instruments with credit-related contingent provisions that are in a liability position and not fully collateralized with cash as of March 31, 2010 and December 31, 2009 is $242 million and $181 million, respectively, and does not include the impact of any offsetting asset positions. See Note 10 for further information about derivative instruments.

Virginia Power

Virginia Power sells electricity and provides distribution and transmission services to customers in Virginia and northeastern North Carolina. Management believes that this geographic concentration risk is mitigated by the diversity of Virginia Power’s customer base, which includes residential, commercial and industrial customers, as well as rural electric cooperatives and municipalities. Credit risk associated with trade accounts receivable from energy consumers is limited due to the large number of customers. Virginia Power’s exposure to potential concentrations of credit risk results primarily from sales to wholesale customers. Virginia Power’s gross credit exposure for each 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 calculated prior to the application of collateral. At March 31, 2010, Virginia Power’s gross credit exposure totaled $27 million. After the application of collateral, credit exposure is reduced to $15 million. Of this amount, investment grade counterparties, including those internally rated, represented $5 million, and no single counterparty, whether investment grade or non-investment grade, exceeded $7 million of exposure.

 

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Certain of Virginia Power’s derivative instruments contain credit-related contingent provisions. These provisions require Virginia Power to provide collateral upon the occurrence of specific events, primarily a credit downgrade. If the credit-related contingent features underlying these instruments that are in a liability position and not fully collateralized with cash were fully triggered as of March 31, 2010 and December 31, 2009, Virginia Power would have been required to post an additional $2 million of collateral to its counterparties. The collateral that would be required to be posted includes the impacts of any offsetting asset positions and any amounts already posted for derivatives, non-derivative contracts and derivatives elected under the normal purchases and normal sales exception, per contractual terms. As of March 31, 2010 and December 31, 2009, Virginia Power had not posted any collateral related to derivatives with credit-related contingent provisions that are in a liability position and not fully collateralized with cash. The aggregate fair value of all derivative instruments with credit-related contingent provisions that are in a liability position and not fully collateralized with cash as of March 31, 2010 and December 31, 2009 is $2 million and does not include the impact of any offsetting asset positions. See Note 10 for further information about derivative instruments.

Note 17. Related Party Transactions

Virginia Power engages in related party transactions primarily with other Dominion subsidiaries (affiliates). Virginia Power’s receivable and payable balances with affiliates are settled based on contractual terms or on a monthly basis, depending on the nature of the underlying transactions. Virginia Power is included in Dominion’s consolidated federal income tax return and participates in certain Dominion benefit plans. A discussion of other significant related party transactions follows.

Transactions with Affiliates

Virginia Power transacts with affiliates for certain quantities of natural gas and other commodities in the ordinary course of business. Virginia Power also enters into certain commodity derivative contracts with affiliates. Virginia Power uses these contracts, which are principally comprised of commodity derivatives, to manage commodity price risks associated with purchases of natural gas. Virginia Power designates the majority of these contracts as cash flow hedges for accounting purposes.

DRS provides accounting, legal, finance and certain administrative and technical services to Virginia Power. In addition, Virginia Power provides certain services to affiliates, including facilities and equipment usage.

Presented below are significant Virginia Power transactions with DRS and other affiliates:

 

     Three Months Ended
March  31,
     2010    2009
(millions)          

Commodity purchases from affiliates

   $ 67    $ 99

Services provided by affiliates

     141      101
             

In March 2010, Virginia Power issued 14,600 shares of its common stock to Dominion reflecting the conversion of approximately $433 million of short-term borrowings from Dominion to equity.

 

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Note 18. Employee Benefit Plans

The components of the provision for net periodic benefit cost (credit) were as follows:

 

     Pension Benefits     Other Postretirement
Benefits
 
Three Months Ended March 31,    2010     2009     2010     2009  
(millions)       

Service cost

   $ 27     $ 26     $ 14     $ 15  

Interest cost

     66       63       25       25  

Expected return on plan assets

     (99     (101     (17     (14

Amortization of prior service cost (credit)

     1       1       (2     (2

Amortization of net loss

     15       9       3       7  

Settlements and curtailments(1)

     84       —          38       —     

Special termination benefits(2)

     9       —          1       —     
                                

Net periodic benefit cost (credit)

   $ 103     $ (2   $ 62     $ 31  
                                

 

(1) Relates to the sale of Peoples and a workforce reduction program.
(2) Represents a one-time special termination benefit for certain employees in connection with a workforce reduction program.

Employer Contributions

Dominion made no contributions to its defined benefit pension plans or other postretirement benefit plans during the three months ended March 31, 2010. Dominion expects to contribute approximately $250 million to its pension plans during the second quarter of 2010 and $56 million to its other postretirement benefit plans through Voluntary Employees’ Beneficiary Associations during the remainder of 2010.

Note 19. Operating Segments

Dominion and Virginia Power are organized primarily on the basis of products and services sold in the U.S. A description of the operations included in the Companies’ primary operating segments is as follows:

 

Primary
Operating Segment

  

Description of Operations

  

Dominion

  

Virginia Power

DVP

   Regulated electric distribution    X    X
   Regulated electric transmission    X    X
   Nonregulated retail energy marketing (electric and gas)    X   

Dominion Generation

   Regulated electric fleet    X    X
   Merchant electric fleet    X   

Dominion Energy

   Gas transmission and storage    X   
   Gas distribution    X   
   LNG import and storage    X   
   Appalachian gas exploration and production    X   
   Producer services    X   

In addition to the operating segments above, the Companies also report a Corporate and Other segment.

The Corporate and Other Segment of Dominion includes its corporate, service company and other functions (including unallocated debt) and certain specific items that are not included in profit measures evaluated by executive management in assessing segment performance or allocating resources among the segments.

In the three months ended March 31, 2010, Dominion reported after-tax net expenses of $402 million for specific items in the Corporate and Other segment, with $215 million of these net expenses attributable to its operating segments. In the three months ended March 31, 2009, Dominion reported after-tax net expenses of $326 million for specific items in the Corporate and Other segment, with $335 million of these net expenses attributable to its operating segments.

 

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The net expenses for specific items in 2010 primarily related to the impact of the following items:

 

   

A $338 million ($206 million after-tax) charge primarily reflecting severance pay and other benefits related to a workforce reduction program, attributable to:

 

   

DVP ($67 million after-tax);

 

   

Dominion Energy ($24 million after-tax); and

 

   

Dominion Generation ($115 million after-tax); and

 

   

A $137 million ($149 million after-tax) loss from the discontinued operations of Peoples primarily reflecting a net loss on the sale.

The net expenses for specific items in 2009 primarily related to the impact of the following items:

 

   

A $455 million ($272 million after-tax) ceiling test impairment charge related to the carrying value of Dominion’s E&P properties, attributable to Dominion Energy; and

 

   

An $83 million ($50 million after-tax) net loss on investments held in nuclear decommissioning trust funds, attributable to Dominion Generation.

The Corporate and Other Segment of Virginia Power primarily includes certain specific items that are not included in profit measures evaluated by executive management in assessing segments performance or allocating resources among the segments. In the three months ended March 31, 2010 and 2009, Virginia Power reported after-tax net expenses of $140 million and $7 million, respectively, for specific items attributable to its operating segments in the Corporate and Other segment.

The net expenses for specific items in 2010 primarily related to the impact of the following:

 

   

A $202 million ($123 million after-tax) charge primarily reflecting severance pay and other benefits related to a workforce reduction program, attributable to:

 

   

DVP ($63 million after-tax); and

 

   

Dominion Generation ($60 million after-tax).

The following table presents segment information pertaining to Dominion’s operations:

 

     DVP    Dominion
Generation
   Dominion
Energy
   Corporate
and Other
    Adjustments/
Eliminations
    Consolidated
Total
 
(millions)       

Three Months Ended March 31, 2010

  

Total revenue from external customers

   $ 1,003    $ 1,978    $ 850    $ 40     $ 297     $ 4,168  

Intersegment revenue

     88      102      273      232       (695     —     
                                             

Total operating revenue

     1,091      2,080      1,123      272       (398     4,168  

Loss from discontinued operations, net of tax

     —        —        —        (149     —          (149
                                             

Net income (loss) attributable to Dominion

     114      325      175      (440     —          174  
                                             

2009

               

Total revenue from external customers

   $ 989    $ 2,262    $ 1,036    $ (21   $ 320     $ 4,586  

Intersegment revenue

     63      66      313      188       (630     —     
                                             

Total operating revenue

     1,052      2,328      1,349      167       (310     4,586  

Income from discontinued operations, net of tax

     —        —        —        9       —          9  
                                             

Net income (loss) attributable to Dominion

     115      369      177      (413     —          248  
                                             

Intersegment sales and transfers for Dominion are based on contractual arrangements and may result in intersegment profit or loss that is eliminated in consolidation.

 

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The following table presents segment information pertaining to Virginia Power’s operations:

 

     DVP    Dominion
Generation
   Corporate
and Other
    Consolidated
Total
(millions)                     

Three Months Ended March 31,

          

2010

          

Operating revenue

   $ 402    $ 1,337    $ —        $ 1,739

Net income (loss)

     93      143      (141     95
                            

2009

          

Operating revenue

   $ 380    $ 1,479    $ —        $ 1,859

Net income (loss)

     90      121      (7     204
                            

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MD&A discusses Dominion’s and Virginia Power’s results of operations and general financial condition. MD&A should be read in conjunction with the Companies’ Consolidated Financial Statements.

Contents of MD&A

MD&A consists of the following information:

 

   

Forward-Looking Statements

 

   

Accounting Matters

 

   

Dominion

 

   

Results of Operations

 

   

Segment Results of Operations

 

   

Virginia Power

 

   

Results of Operations

 

   

Segment Results of Operations

 

   

Liquidity and Capital Resources

 

   

Future Issues and Other Matters

Forward-Looking Statements

This report contains statements concerning Dominion’s and Virginia Power’s expectations, plans, objectives, future financial performance and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In most cases, the reader can identify these forward-looking statements by such words as “anticipate,” “estimate,” “forecast,” “expect,” “believe,” “should,” “could,” “plan,” “may,” “target” or other similar words.

Dominion and Virginia Power make forward-looking statements with full knowledge that risks and uncertainties exist that may cause actual results to differ materially from predicted results. Factors that may cause actual results to differ are often presented with the forward-looking statements themselves. Additionally, other factors may cause actual results to differ materially from those indicated in any forward-looking statement. These factors include but are not limited to:

 

   

Unusual weather conditions and their effect on energy sales to customers and energy commodity prices;

 

   

Extreme weather events, including hurricanes, high winds and severe storms, that can cause outages and property damage to facilities;

 

   

Federal, state and local legislative and regulatory developments;

 

   

Changes to federal, state and local environmental laws and regulations, including those related to climate change, the tightening of emission or discharge limits for GHGs and other emissions, more extensive permitting requirements and the regulation of additional substances;

 

   

Cost of environmental compliance, including those costs related to climate change;

 

   

Risks associated with the operation of nuclear facilities;

 

   

Unplanned outages of the Companies’ generation facilities;

 

   

Fluctuations in energy-related commodity prices and the effect these could have on Dominion’s earnings and Dominion’s and Virginia Power’s liquidity position and the underlying value of their assets;

 

   

Counterparty credit risk;

 

   

Capital market conditions, including the availability of credit and the ability to obtain financing on reasonable terms;

 

   

Risks associated with Virginia Power’s membership and participation in PJM related to obligations created by the default of other participants;

 

   

Price risk due to investments held in nuclear decommissioning trusts by Dominion and Virginia Power and in benefit plan trusts by Dominion;

 

   

Fluctuations in interest rates;

 

   

Changes in federal and state tax laws and regulations;

 

   

Changes in rating agency requirements or credit ratings and their effect on availability and cost of capital;

 

   

Changes in financial or regulatory accounting principles or policies imposed by governing bodies;

 

   

Employee workforce factors including collective bargaining agreements and labor negotiations with union employees;

 

   

The risks of operating businesses in regulated industries that are subject to changing regulatory structures;

 

   

Receipt of approvals for, and timing of, closing dates for acquisitions and divestitures;

 

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Changes in rules for RTOs in which Dominion and Virginia Power participate, including changes in rate designs and new and evolving capacity models;

 

   

Political and economic conditions, including the threat of domestic terrorism, inflation and deflation;

 

   

Changes to regulated electric rates collected by Virginia Power;

 

   

Timing and receipt of regulatory approvals necessary for planned construction or expansion projects;

 

   

The inability to complete planned construction projects within the terms and time frames initially anticipated; and

 

   

Adverse outcomes in litigation matters.

Additionally, other risks that could cause actual results to differ from predicted results are set forth in Item 1A. Risk Factors in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2009.

Dominion’s and Virginia Power’s forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. The Companies caution the reader not to place undue reliance on their forward-looking statements because the assumptions, beliefs, expectations and projections about future events may, and often do, differ materially from actual results. Dominion and Virginia Power undertake no obligation to update any forward-looking statement to reflect developments occurring after the statement is made.

Accounting Matters

Critical Accounting Policies and Estimates

As of March 31, 2010, there have been no significant changes with regard to the critical accounting policies and estimates disclosed in MD&A in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2009. The policies disclosed included the accounting for regulated operations, asset retirement obligations, income taxes, derivative contracts and other instruments at fair value, goodwill and long-lived asset impairment testing, employee benefit plans, gas and oil operations, and unbilled revenue.

Other

See Note 9 to Dominion’s and Virginia Power’s Consolidated Financial Statements for information on fair value measurements.

Dominion

Results of Operations

Presented below is a summary of Dominion’s consolidated results:

 

     2010    2009    $ Change  
(millions, except EPS)                 

First Quarter

        

Net income attributable to Dominion

   $ 174    $ 248    $ (74

Diluted EPS

     0.29      0.42      (0.13
                      

Overview

First Quarter 2010 vs. 2009

Net income attributable to Dominion decreased by 30%. Unfavorable drivers include charges related to a workforce reduction program, a loss on the sale of Peoples and lower margins from merchant generation operations. Favorable drivers include lower ceiling test impairment charges related to the carrying value of Dominion’s E&P properties and the impact of net realized gains for its merchant nuclear decommissioning trust funds in 2010 as compared to net realized losses in 2009.

 

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Analysis of Consolidated Operations

Presented below are selected amounts related to Dominion’s results of operations.

 

     First Quarter  
     2010     2009     $ Change  
(millions)                   

Operating revenue

   $ 4,168      $ 4,586      $ (418 )

Electric fuel and other energy-related purchases

     1,028       1,141       (113 )

Purchased electric capacity

     108       108       —     

Purchased gas

     792       1,007       (215 )
                        

Net revenue

     2,240       2,330       (90 )