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, 2012. See Note 8 in this report for further information about fair value measurements and associated valuation methods for derivatives.

Derivative assets and liabilities are presented gross on Dominion's and Virginia Power's Consolidated Balance Sheets. Dominion's and Virginia Power's derivative contracts include both over-the-counter transactions and those that are executed on an exchange or other trading platform (exchange contracts) and centrally cleared. Over-the-counter contracts are bilateral contracts that are transacted directly with a third party. Exchange contracts utilize a financial intermediary, exchange, or clearinghouse to enter, execute, or clear the transactions. Certain over-the-counter and exchange contracts contain contractual rights of setoff through master netting arrangements, derivative clearing agreements, and contract default provisions. In addition, the contracts are subject to conditional rights of setoff through counterparty nonperformance, insolvency, or other conditions.

In general, most over-the-counter transactions and all exchange contracts are subject to collateral requirements. Types of collateral for over-the-counter and exchange contracts include cash, letters of credit, and in some cases other forms of security, none of which are subject to restrictions. Cash collateral is used in the table below to offset derivative assets and liabilities. Certain accounts receivable and accounts payable recognized on Dominion's and Virginia Power's Consolidated Balance Sheets, as well as letters of credit and other forms of security, all of which are not included in the tables below, are subject to offset under master netting agreements or similar agreements and would reduce the net exposure.

Dominion

The tables below present Dominion's derivative asset and liability balances by type of financial instrument, before and after the effects of offsetting, as of March 31, 2013:



	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Assets Presented in the Consolidated Balance Sheet
(millions)
Interest rate contracts:
Over-the-counter	$	78	$	—	$	78
Commodity contracts:
Over-the-counter	245		—		245
Exchange	418		—		418
Total derivatives, subject to a master netting arrangement or similar arrangement	741		—		741
Total derivatives, not subject to a master netting arrangement or similar arrangement	10		—		10
Total⁽¹⁾	$	751	$	—	$	751


(1)	The total derivative asset balance contains $534 million of current assets, $527 million and $7 million which is presented in current derivative assets and assets held for sale, respectively, in Dominion’s Consolidated Balance Sheet, and $217 million of noncurrent derivative assets, which is presented in other deferred charges and other assets in Dominion’s Consolidated Balance Sheet.



			Gross Amounts Not Offset in the Consolidated Balance Sheet
	Net Amounts of Assets Presented in the Consolidated Balance Sheet		Financial Instruments		Cash Collateral Received		Net Amounts
(millions)
Interest rate contracts:
Over-the-counter	$	78	$	15	$	—	$	63
Commodity contracts:
Over-the-counter	245		74		—		171
Exchange	418		405		1		12
Total	$	741	$	494	$	1	$	246



	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Assets Presented in the Consolidated Balance Sheet
(millions)
Interest rate contracts:
Over-the-counter	$	33	$	—	$	33
Commodity contracts:
Over-the-counter	145		—		145
Exchange	462		—		462
Total derivatives, subject to a master netting arrangement or similar arrangement	640		—		640
Total derivatives, not subject to a master netting arrangement or similar arrangement	4		—		4
Total⁽¹⁾	$	644	$	—	$	644


(1)	The total derivative liability balance contains $556 million of current liabilities, which is presented in current derivative liabilities in Dominion’s Consolidated Balance Sheet, and $88 million of noncurrent derivative liabilities, which is presented in the other deferred credits and other liabilities in Dominion’s Consolidated Balance Sheet.



			Gross Amounts Not Offset in the Consolidated Balance Sheet
	Net Amounts of Liabilities Presented in the Consolidated Balance Sheet		Financial Instruments		Cash Collateral Paid		Net Amounts
(millions)
Interest rate contracts:
Over-the-counter	$	33	$	15	$	—	$	18
Commodity contracts:
Over-the-counter	145		74		13		58
Exchange	462		405		57		—
Total	$	640	$	494	$	70	$	76

The tables below present Dominion's derivative asset and liability balances by type of financial instrument, before and after the effects of offsetting, as of December 31, 2012:



	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Assets Presented in the Consolidated Balance Sheet
(millions)
Interest rate contracts:
Over-the-counter	$	93	$	—	$	93
Commodity contracts:
Over-the-counter	290		—		290
Exchange	416		—		416
Total derivatives, subject to a master netting arrangement or similar arrangement	799		—		799
Total derivatives, not subject to a master netting arrangement or similar arrangement	29		—		29
Total⁽¹⁾	$	828	$	—	$	828


(1)	The total derivative asset balance contains $518 million of current assets, which is presented in current derivative assets in Dominion’s Consolidated Balance Sheet and $310 million of noncurrent derivative assets, which is presented in other deferred charges and other assets in Dominion’s Consolidated Balance Sheet.



			Gross Amounts Not Offset in the Consolidated Balance Sheet
	Net Amounts of Assets Presented in the Consolidated Balance Sheet		Financial Instruments		Cash Collateral Received		Net Amounts
(millions)
Interest rate contracts:
Over-the-counter	$	93	$	19	$	—	$	74
Commodity contracts:							—
Over-the-counter	290		97		—		193
Exchange	416		350		4		62
Total	$	799	$	466	$	4	$	329



	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Assets Presented in the Consolidated Balance Sheet
(millions)
Interest rate contracts:
Over-the-counter	$	66	$	—	$	66
Commodity contracts:
Over-the-counter	191		—		191
Exchange	393		—		393
Total derivatives, subject to a master netting arrangement or similar arrangement	650		—		650
Total derivatives, not subject to a master netting arrangement or similar arrangement	11		—		11
Total⁽¹⁾	$	661	$	—	$	661


(1)	The total derivative liability balance contains $510 million of current liabilities, which is presented in current derivative liabilities in Dominion’s Consolidated Balance Sheet and $151 million of noncurrent derivative liabilities, which is presented in other deferred credits and other liabilities in Dominion’s Consolidated Balance Sheet.



			Gross Amounts Not Offset in the Consolidated Balance Sheet
	Net Amounts of Liabilities Presented in the Consolidated Balance Sheet		Financial Instruments		Cash Collateral Paid		Net Amounts
(millions)
Interest rate contracts:
Over-the-counter	$	66	$	19	$	—	$	47
Commodity contracts:							—
Over-the-counter	191		97		20		74
Exchange	393		350		43		—
Total	$	650	$	466	$	63	$	121

The following table presents the volume of Dominion’s derivative activity as of March 31, 2013. These volumes are based on open derivative positions and represent the combined absolute value of their long and short positions, except in the case of offsetting transactions, for which they represent the absolute value of the net volume of their long and short positions.



	Current		Noncurrent
Natural Gas (bcf):
Fixed price⁽¹⁾	292		47
Basis	875		482
Electricity (MWh):
Fixed price⁽¹⁾	19,932,885		15,662,175
FTRs	19,950,674		—
Capacity (MW)	200,525		90,744
Liquids (Gal)⁽²⁾	161,322,000		109,284,000
Interest rate	$	1,350,000,000	$	1,650,000,000


(1)	Includes options.


(2)	Includes NGLs and oil.

For the three months ended March 31, 2013 and 2012, gains or losses on hedging instruments determined to be ineffective and amounts excluded from the assessment of effectiveness were not material. Amounts excluded from the assessment of effectiveness include gains or losses attributable to changes in the time value of options and changes in the differences between spot prices and forward prices.

The following table presents selected information related to gains (losses) on cash flow hedges included in AOCI in Dominion’s Consolidated Balance Sheet at March 31, 2013:



	AOCI After-Tax			Amounts Expected to be Reclassified to Earnings during the next 12 Months After-Tax			Maximum Term
(millions)
Commodities:
Gas	$	(20	)	$	(14	)	31 months
Electricity	31			(12		)	33 months
Other	8			4			38 months
Interest rate	(155		)	(27		)	358 months
Total	$	(136	)	$	(49	)

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

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, 2013
ASSETS
Current Assets
Commodity	$	94	$	406	$	500
Interest rate	34		—		34
Total current derivative assets⁽¹⁾	128		406		534
Noncurrent Assets
Commodity	106		67		173
Interest rate	44		—		44
Total noncurrent derivative assets⁽²⁾	150		67		217
Total derivative assets	$	278	$	473	$	751
LIABILITIES
Current Liabilities
Commodity	$	123	$	400	$	523
Interest rate	33		—		33
Total current derivative liabilities	156		400		556
Noncurrent Liabilities
Commodity	46		42		88
Total noncurrent derivative liabilities⁽³⁾	46		42		88
Total derivative liabilities	$	202	$	442	$	644
December 31, 2012
ASSETS
Current Assets
Commodity	$	103	$	379	$	482
Interest rate	36		—		36
Total current derivative assets	139		379		518
Noncurrent Assets
Commodity	130		123		253
Interest rate	57		—		57
Total noncurrent derivative assets⁽²⁾	187		123		310
Total derivative assets	$	326	$	502	$	828
LIABILITIES
Current Liabilities
Commodity	$	103	$	341	$	444
Interest rate	66		—		66
Total current derivative liabilities	169		341		510
Noncurrent Liabilities
Commodity	58		93		151
Total noncurrent derivative liabilities⁽³⁾	58		93		151
Total derivative liabilities	$	227	$	434	$	661


(1)	$7 million of current derivative assets are classified as assets held for sale in Dominion’s Consolidated Balance Sheet. See Note 3 for further information.

(2) Noncurrent derivative assets are presented in other deferred charges and other assets 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 March 31, 2013
Derivative Type and Location of Gains (Losses)
Commodity:
Operating revenue				$	(84	)
Purchased gas				(34		)
Electric fuel and other energy-related purchases				(3		)
Total commodity	$	(157	)	(121		)	$	7
Interest rate⁽³⁾	13			(3		)	16
Total	$	(144	)	$	(124	)	$	23
Three Months Ended March 31, 2012
Derivative Type and Location of Gains (Losses)
Commodity:
Operating revenue				$	64
Purchased gas				(30		)
Electric fuel and other energy-related purchases				(7		)
Total commodity	$	176		27			$	(1	)
Interest rate⁽³⁾	32			1			27
Total	$	208		$	28		$	26


(1)	Amounts deferred into AOCI have no associated effect in Dominion’s Consolidated Statements of Income.


(2)	Represents net derivative activity deferred into and amortized out of regulatory assets/liabilities. Amounts deferred into regulatory assets/liabilities have no associated effect in Dominion’s Consolidated Statements of Income.


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



	Amount of Gain (Loss) Recognized in Income on Derivatives⁽¹⁾
	Three Months Ended March 31,
Derivatives not designated as hedging instruments	2013		2012
(millions)
Derivative Type and Location of Gains (Losses)
Commodity
Operating revenue	$	3	$	69
Purchased gas	18		(10		)
Electric fuel and other energy-related purchases	3		(27		)
Interest rate⁽²⁾	—		(2		)
Total	$	24	$	30


(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.

Virginia Power

The following table presents the volume of Virginia Power’s derivative activity as of March 31, 2013. These volumes are based on open derivative positions and represent the combined absolute value of their long and short positions, except in the case of offsetting transactions, for which they represent the absolute value of the net volume of their long and short positions.



	Current		Noncurrent
Natural Gas (bcf):
Fixed price	16		—
Basis	8		—
Electricity (MWh):
Fixed price	644,000		—
FTRs	17,168,056		—
Capacity (MW)	152,000		48,800
Interest rate	$	—	$	250,000,000