Derivatives and Hedge Accounting Activities

9 Months Ended

Sep. 30, 2011

Derivatives and Hedge Accounting Activities

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, 2010. 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 September 30, 2011. 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)	257		67
Basis	891		405
Electricity (MWh):
Fixed price(1)	20,137,147		23,255,392
FTRs	78,993,580		779,328
Capacity (MW)	155,416		289,585
Liquids (gallons)(2)	138,516,000		281,064,000
Interest rate	$	1,600,000,000	$	2,690,000,000

(1) Includes options.

(2) Includes NGLs and oil.

For the three and nine months ended September 30, 2011 and 2010, 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 and nine months ended September 30, 2011 and 2010.

The following table presents selected information related to gains (losses) on cash flow hedges included in AOCI in Dominion’s Consolidated Balance Sheet at September 30, 2011:

	AOCI After-Tax			Amounts Expected to be Reclassified to Earnings during the next 12 Months After-Tax			Maximum Term
(millions)
Commodities:
Gas	$	(19	)	$	(7	)	39 months
Electricity	38			21			51 months
NGLs	(39		)	(24		)	39 months
Other	6			1			44 months
Interest rate	(107		)	(5		)	375 months
Total	$	(121	)	$	(14	)

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

The sale of the majority of Dominion’s remaining E&P operations during 2010 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 during the first and second quarters of 2010 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 $110 million ($67 million after-tax) in the nine months ended September 30, 2010. The reclassification of gains from AOCI to earnings was partially offset by subsequent changes in fair value of $37 million ($23 million after-tax) for the nine months ended September 30, 2010.

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)
September 30, 2011
ASSETS
Current Assets
Commodity	$	150	$	412	$	562
Interest rate	36		—		36
Total current derivative assets	186		412		598
Noncurrent Assets
Commodity	105		97		202
Interest rate	67		—		67
Total noncurrent derivative assets(1)	172		97		269
Total derivative assets	$	358	$	509	$	867
LIABILITIES
Current Liabilities
Commodity	$	186	$	476	$	662
Interest rate	124		7		131
Total current derivative liabilities(2)	310		483		793
Noncurrent Liabilities
Commodity	119		103		222
Interest rate	74		31		105
Total noncurrent derivative liabilities(3)	193		134		327
Total derivative liabilities	$	503	$	617	$	1,120
December 31, 2010
ASSETS
Current Assets
Commodity	$	291	$	425	$	716
Interest rate	23		—		23
Total current derivative assets	314		425		739
Noncurrent Assets
Commodity	44		83		127
Interest rate	31		—		31
Total noncurrent derivative assets(1)	75		83		158
Total derivative assets	$	389	$	508	$	897
LIABILITIES
Current Liabilities
Commodity	$	178	$	455	$	633
Total current derivative liabilities(2)	178		455		633
Noncurrent Liabilities
Commodity	86		106		192
Interest rate	5		—		5
Total noncurrent derivative liabilities(3)	91		106		197
Total derivative liabilities	$	269	$	561	$	830

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

(2) Current derivative liabilities are presented in other current liabilities in Dominion's Consolidated Balance Sheets.

(3) Noncurrent derivative liabilities are presented in other deferred credits and other liabilities in Dominion’s Consolidated Balance Sheets.

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 September 30, 2011
Derivative Type and Location of Gains (Losses)
Commodity:
Operating revenue				$	28
Purchased gas				(7		)
Electric fuel and other energy-related purchases				2
Total commodity	$	69		23			$	(1	)
Interest rate(3)	(204		)	(8		)	(76		)
Total	$	(135	)	$	15		$	(77	)
Three Months Ended September 30, 2010
Derivative Type and Location of Gains (Losses)
Commodity:
Operating revenue				$	88
Purchased gas				(6		)
Electric fuel and other energy-related purchases				4
Purchased electric capacity				1
Total commodity	$	(5	)	87			$	(6	)
Interest rate(3)	—			—			1
Foreign currency(4)	—			—			—
Total	$	(5	)	$	87		$	(5	)
Nine Months Ended September 30, 2011
Derivative Type and Location of Gains (Losses)
Commodity:
Operating revenue				$	88
Purchased gas				(61		)
Electric fuel and other energy-related purchases				4
Purchased electric capacity				1
Total commodity	$	(24	)	32			$	(10	)
Interest rate(3)	(236		)	(8		)	(76		)
Total	$	(260	)	$	24		$	(86	)
Nine Months Ended September 30, 2010
Derivative Type and Location of Gains (Losses)
Commodity:
Operating revenue				$	383
Purchased gas				(122		)
Electric fuel and other energy-related purchases				(4		)
Purchased electric capacity				3
Total commodity	$	277		260			$	(17	)
Interest rate(3)	(3		)	109			(23		)
Foreign currency(4)	—			1			(2		)
Total	$	274		$	370		$	(42	)

(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.

	Amount of Gain (Loss) Recognized in Income on Derivatives(1)
	Three Months Ended September 30,						Nine Months Ended September 30,
Derivatives not designated as hedging instruments	2011			2010			2011			2010
(millions)
Derivative Type and Location of Gains (Losses)
Commodity
Operating revenue	$	15		$	45		$	56		$	71
Purchased gas	(10		)	(13		)	(28		)	(42		)
Electric fuel and other energy-related purchases	(8		)	23			(16		)	48
Interest rate(2)	(4		)	—			(4		)	(37		)
Total	$	(7	)	$	55		$	8		$	40

(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.

(2) Amounts recorded in Dominion’s Consolidated Statements of Income are classified in interest and related charges.