Fair Value Measurements

9 Months Ended

Sep. 30, 2011

Fair Value Measurements

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, 2010. See Note 10 in this report for further information about their derivatives and hedge accounting activities.

At September 30, 2011, Dominion's and Virginia Power's net balance of commodity derivatives categorized as Level 3 fair value measurements was a net liability of $42 million and $21 million, respectively. A hypothetical 10% increase in commodity prices would increase Dominion's and Virginia Power's Level 3 net liability by $100 million and $7 million, respectively, while a hypothetical 10% decrease in commodity prices would decrease Dominion's and Virginia Power's Level 3 net liability by $101 million and $7 million, respectively.

Non-recurring Fair Value Measurements

In September 2010, Virginia Power evaluated its SO₂ emissions allowances not expected to be consumed by its generating units for potential impairment due to the significant decline in market prices since the July 2010 release of the EPA's proposed replacement rule for CAIR, ultimately known as CSAPR. As a result of this evaluation, Virginia Power recorded an impairment charge of $13 million ($8 million after-tax) in other operations and maintenance expense in its Consolidated Statement of Income, to write down its SO₂ emissions allowances not expected to be consumed to their estimated fair value of less than $1 million. In the third quarter of 2011, Dominion and Virginia Power evaluated their SO₂ emissions allowances not expected to be consumed by generating units for potential impairment due to the EPA's issuance of CSAPR as discussed in Note 15. Prior to the issuance of CSAPR, Dominion and Virginia Power held $57 million and $43 million, respectively, of SO₂ emissions allowances obtained for ARP and CAIR compliance. Due to CSAPR's establishment of a new allowance program and the elimination of CAIR, Dominion and Virginia Power have more SO₂ emissions allowances than needed for ARP compliance. As a result of this evaluation, Dominion and Virginia Power recorded an impairment charge of $57 million ($34 million after-tax) and $43 million ($26 million after-tax), respectively, in other operations and maintenance expense in their Consolidated Statements of Income, to write down these emissions allowances to their estimated fair value of less than $1 million. To estimate the value of these emissions allowances in both impairment tests, Dominion utilized a market approach by obtaining broker quotes to validate CSAPR's impact on emissions allowance prices. However, due to limited market activity for future SO₂ vintage year allowances, these are considered a Level 3 fair value measurement.

In June 2010, Dominion evaluated State Line for impairment due to the station's relatively low level of profitability combined with the EPA's issuance of a new stringent 1-hour primary NAAQS for SO₂ that would likely require significant environmental capital expenditures in the future. As a result of this evaluation, Dominion recorded an impairment charge of $163 million ($95 million after-tax) in other operations and maintenance expense in its Consolidated Statement of Income, to write down State Line's long-lived assets to their estimated fair value of $59 million. During March 2011, Dominion determined that it was unlikely that State Line would participate in the May 2011 PJM capacity base residual auction that would commit State Line's capacity from June 2014 through May 2015.  This determination reflected an expectation that margins for coal-fired generation will remain compressed in the 2014 and 2015 period in combination with the expectation that State Line may be impacted during the same time period by environmental regulations that would likely require significant capital expenditures. As a result, Dominion evaluated State Line for impairment since it was more likely than not that State Line would be retired before the end of its previously estimated useful life. As a result of this evaluation, Dominion recorded an impairment charge of $55 million ($39 million after-tax) reflected in other operations and maintenance expense in its Consolidated Statement of Income, to write down State Line's long-lived assets to their estimated fair value of less than $1 million. As management was not aware of any recent market transactions for comparable assets with sufficient transparency to develop a market approach to fair value, Dominion used the income approach (discounted cash flows) to estimate the fair value of State Line's long-lived assets in both impairment tests. These were considered Level 3 fair value measurements due to the use of significant unobservable inputs including estimates of future power and other commodity prices.

Recurring Fair Value Measurements

Dominion

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

	Level 1		Level 2		Level 3		Total
(millions)
At September 30, 2011
Assets
Derivatives:
Commodity	$	34	$	623	$	107	$	764
Interest rate	—		103		—		103
Investments(1):
Equity securities:
U.S.:
Large cap	1,551		—		—		1,551
Other	45		—		—		45
Non-U.S.:
Large cap	11		—		—		11
Fixed Income:
Corporate debt instruments	—		310		—		310
U.S. Treasury securities and agency debentures	309		175		—		484
State and municipal	—		296		—		296
Other	—		29		—		29
Cash equivalents and other	1		69		—		70
Restricted cash equivalents	—		204		—		204
Total assets	$	1,951	$	1,809	$	107	$	3,867
Liabilities
Derivatives:
Commodity	$	7	$	728	$	149	$	884
Interest Rate	—		236		—		236
Total liabilities	$	7	$	964	$	149	$	1,120
At December 31, 2010
Assets
Derivatives:
Commodity	$	62	$	734	$	47	$	843
Interest rate	—		54		—		54
Investments(1):
Equity securities:
U.S.:
Large cap	1,709		—		—		1,709
Other	56		—		—		56
Non-U.S.:
Large cap	12		—		—		12
Fixed Income:
Corporate debt instruments	—		327		—		327
U.S. Treasury securities and agency debentures	228		165		—		393
State and municipal	—		286		—		286
Other	—		19		—		19
Cash equivalents and other	25		97		—		122
Restricted cash equivalents	—		400		—		400
Total assets	$	2,092	$	2,082	$	47	$	4,221
Liabilities
Derivatives:
Commodity	$	12	$	716	$	97	$	825
Interest rate	—		5		—		5
Total liabilities	$	12	$	721	$	97	$	830

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

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 September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
(millions)
Beginning balance	$	(122	)	$	32		$	(50	)	$	(66	)
Total realized and unrealized gains (losses):
Included in earnings	(16		)	27			(24		)	40
Included in other comprehensive income (loss)	75			(65		)	16			20
Included in regulatory assets/liabilities	(3		)	(13		)	(35		)	1
Settlements	24			(23		)	47			(41		)
Transfers out of Level 3	—			25			4			29
Ending balance	$	(42	)	$	(17	)	$	(42	)	$	(17	)
The amount of gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets/liabilities still held at the reporting date	$	7		$	4		$	29		$	(3	)

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 September 30, 2011
Total gains (losses) included in earnings	$	(8	)	$	(8	)	$	—		$	(16	)
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	7			—			—			7
Three Months Ended September 30, 2010
Total gains (losses) included in earnings	$	5		$	22		$	—		$	27
The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets/liabilities still held at the reporting date	4			—			—			4
Nine Months Ended September 30, 2011
Total gains (losses) included in earnings	$	(8	)	$	(16	)	$	—		$	(24	)
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	29			—			—			29
Nine Months Ended September 30, 2010
Total gains (losses) included in earnings	$	(5	)	$	49		$	(4	)	$	40
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	(3		)	—			—			(3		)

Virginia Power

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

	Level 1		Level 2		Level 3		Total
(millions)
At September 30, 2011
Assets
Derivatives:
Commodity	$	—	$	1	$	2	$	3
Investments(1):
Equity securities:
U.S.:
Large cap	613		—		—		613
Other	20		—		—		20
Fixed income:
Corporate debt instruments	—		189		—		189
U.S. Treasury securities and agency debentures	146		50		—		196
State and municipal	—		100		—		100
Other	—		22		—		22
Cash equivalents and other	—		47		—		47
Restricted cash equivalents	—		38		—		38
Total assets	$	779	$	447	$	2	$	1,228
Liabilities
Derivatives:
Commodity	$	—	$	6	$	23	$	29
Interest Rate	—		82		—		82
Total liabilities	$	—	$	88	$	23	$	111
At December 31, 2010
Assets
Derivatives:
Commodity	$	—	$	12	$	15	$	27
Investments(1):
Equity securities:
U.S.:
Large cap	676		—		—		676
Other	25		—		—		25
Fixed Income:
Corporate debt instruments	—		215		—		215
U.S. Treasury securities and agency debentures	80		63		—		143
State and municipal	—		102		—		102
Other	—		15		—		15
Cash equivalents and other	10		61		—		71
Restricted cash equivalents	—		169		—		169
Total assets	$	791	$	637	$	15	$	1,443
Liabilities
Derivatives:
Commodity	$	—	$	5	$	1	$	6
Total liabilities	$	—	$	5	$	1	$	6

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

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 September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
(millions)
Beginning balance	$	(18	)	$	5		$	14		$	(10	)
Total realized and unrealized gains (losses):
Included in earnings	(8		)	22			(16		)	48
Included in regulatory assets/liabilities	(3		)	(13		)	(35		)	2
Settlements	8			(22		)	16			(48		)
Ending balance	$	(21	)	$	(8	)	$	(21	)	$	(8	)

The gains and losses included in earnings in the Level 3 fair value category were classified in electric fuel and other energy-related purchases in Virginia Power's Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010. There were no unrealized gains and losses included in earnings in the Level 3 fair value category relating to assets/liabilities still held at the reporting date for the three and nine months ended September 30, 2011 and 2010.

Fair Value of Financial Instruments

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

	September 30, 2011				December 31, 2010
	Carrying Amount		Estimated Fair Value(1)		Carrying Amount		Estimated Fair Value(1)
(millions)
Dominion
Long-term debt, including securities due within one year(2)	$	16,745	$	19,381	$	14,520	$	16,112
Junior subordinated notes payable to affiliates	268		275		268		261
Enhanced junior subordinated notes	1,467		1,539		1,467		1,560
Subsidiary preferred stock(3)	257		262		257		249
Virginia Power
Long-term debt, including securities due within one year(2)	$	6,868	$	8,233	$	6,717	$	7,489
Preferred stock(3)	257		262		257		249

(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 September 30, 2011 and December 31, 2010, includes the valuation of certain fair value hedges associated with Dominion’s fixed rate debt of approximately $103 million and $49 million, respectively.

(3) Includes issuance expenses of $2 million at September 30, 2011 and December 31, 2010.