EMPLOYEE BENEFIT PLANS

DOMINION

Dominion provides certain retirement benefits to eligible active employees, retirees and qualifying dependents. Under the terms of its benefit plans, Dominion reserves the right to change, modify or terminate the plans. From time to time in the past, benefits have changed, and some of these changes have reduced benefits.

Dominion maintains qualified noncontributory defined benefit pension plans covering virtually all employees. Retirement benefits are based primarily on years of service, age and the employee's compensation. Dominion's funding policy is to contribute annually an amount that is in accordance with the provisions of ERISA. The pension program also provides benefits to certain retired executives under a company-sponsored nonqualified employee benefit plan. The nonqualified plan is funded through contributions to a grantor trust. Dominion also provides retiree healthcare and life insurance benefits with annual employee premiums based on several factors such as age, retirement date and years of service.

Pension and other postretirement benefit costs are affected by employee demographics (including age, compensation levels and years of service), the level of contributions made to the plans and earnings on plan assets. These costs may also be affected by changes in key assumptions, including expected long-term rates of return on plan assets, discount rates, healthcare cost trend rates and the rate of compensation increases.

Dominion uses December 31 as the measurement date for all of its employee benefit plans. Dominion uses the market-related value of pension plan assets to determine the expected return on plan assets, a component of net periodic pension cost. The market-related value recognizes changes in fair value on a straight-line basis over a four-year period, which reduces year-to-year volatility. Changes in fair value are measured as the difference between the expected and actual plan asset returns, including dividends, interest and realized and unrealized investment gains and losses. Since the market-related value recognizes changes in fair value over a four-year period, the future market-related value of pension plan assets will be impacted as previously unrecognized changes in fair value are recognized.

Dominion's pension and other postretirement benefit plans hold investments in trusts to fund employee benefit payments. Aggregate actual returns for Dominion's pension and other postretirement plan assets were $743 million in 2012 and $273 million in 2011, versus expected returns of $509 million and $519 million, respectively. Differences between actual and expected returns on plan assets are accumulated and amortized during future periods. As such, any investment-related declines in these trusts will result in future increases in the periodic cost recognized for such employee benefit plans and will be included in the determination of the amount of cash to be contributed to the employee benefit plans.

In January 2011, Dominion amended its retiree healthcare and life benefits to change the eligibility age, effective January 1, 2012, for the majority of nonunion employees from 55 with 10 years of service to 58 with 10 years of service, resulting in an approximately $71 million reduction to the other postretirement benefit plan obligation. The eligibility requirements for nonunion employees hired on or after January 1, 2008, who benefit under the Retiree Medical Account design, as well as for union employees were not affected by this plan design change.

The Medicare Act introduced a federal subsidy to sponsors of retiree healthcare benefit plans that provide a prescription drug benefit that is at least actuarially equivalent to Medicare Part D. Dominion determined that the prescription drug benefit offered under its other postretirement benefit plans is at least actuarially equivalent to Medicare Part D. Dominion received a federal subsidy of $5 million for each of 2012 and 2011. In December 2011, Dominion elected to change its method of receiving the subsidy under Medicare Part D for retiree prescription drug coverage from the Retiree Drug Subsidy to the EGWP. This change became effective January 1, 2013. As a result of this change, Dominion recognized a decrease in its other postretirement benefit obligations of approximately $170 million as of December 31, 2011. As a result of the adoption of the EGWP, beginning in 2013 Dominion will receive an increased level of Medicare Part D subsidies, in the form of reduced costs rather than a direct reimbursement.

Funded Status

The following table summarizes the changes in Dominion's pension plan and other postretirement benefit plan obligations and plan assets and includes a statement of the plans' funded status:



	Pension Benefits						Other Postretirement Benefits
Year Ended December 31,	2012			2011			2012			2011
(millions, except percentages)
Changes in benefit obligation:
Benefit obligation at beginning of year	$	4,981		$	4,490		$	1,493		$	1,707
Service cost	116			108			44			48
Interest cost	268			258			79			94
Benefits paid	(208		)	(215		)	(88		)	(83		)
Actuarial (gains) losses during the year	967			340			191			(210		)
Plan amendments	1			—			1			(70		)
Settlements and curtailments⁽²⁾	—			—			(6		)	(1		)
Medicare Part D reimbursement	—			—			5			5
Early Retirement Reimbursement Program	—			—			—			3
Benefit obligation at end of year	$	6,125		$	4,981		$	1,719		$	1,493
Changes in fair value of plan assets:
Fair value of plan assets at beginning of year	$	5,145		$	5,106		$	1,042		$	1,031
Actual return on plan assets	611			247			132			26
Employer contributions	5			7			16			19
Benefits paid	(208		)	(215		)	(34		)	(34		)
Fair value of plan assets at end of year	$	5,553		$	5,145		$	1,156		$	1,042
Funded status at end of year	$	(572	)	$	164		$	(563	)	$	(451	)
Amounts recognized in the Consolidated Balance Sheets at December 31:
Noncurrent pension and other postretirement benefit assets	701			677			1			4
Other current liabilities	(2		)	(3		)	(4		)	(3		)
Noncurrent pension and other postretirement benefit liabilities	(1,271		)	(510		)	(560		)	(452		)
Net amount recognized	$	(572	)	$	164		$	(563	)	$	(451	)
Significant assumptions used to determine benefit obligations as of December 31:
Discount rate	4.4		%	5.5		%	4.4		%	5.5		%
Weighted average rate of increase for compensation	4.21		%	4.21		%	4.22		%	4.22		%

The ABO for all of Dominion's defined benefit pension plans was $5.5 billion and $4.5 billion at December 31, 2012 and 2011, respectively.

Under its funding policies, Dominion evaluates plan funding requirements annually, usually in the fourth quarter after receiving updated plan information from its actuary. Based on the funded status of each plan and other factors, Dominion determines the amount of contributions for the current year, if any, at that time. During 2012, Dominion made no contributions to its qualified defined benefit pension plans and no contributions are currently expected in 2013. In July 2012, the Moving Ahead for Progress in the 21^st Century Act was signed into law. This Act includes an increase in the interest rates used to determine plan sponsors' pension contributions for required funding purposes. These new interest rates are expected to reduce required pension contributions for 2013 through 2015. Dominion believes that required pension contributions will rise subsequent to 2015, resulting in little net impact to cumulative required contributions over a 10-year period.

Certain regulatory authorities have held that amounts recovered in utility customers' rates for other postretirement benefits, in excess of benefits actually paid during the year, must be deposited in trust funds dedicated for the sole purpose of paying such benefits. Accordingly, certain of Dominion's subsidiaries fund other postretirement benefit costs through VEBAs. Dominion's remaining subsidiaries do not prefund other postretirement benefit costs but instead pay claims as presented. Dominion expects to contribute approximately $14 million to the Dominion VEBAs in 2013.

Dominion does not expect any pension or other postretirement plan assets to be returned to the Company during 2013.

The following table provides information on the benefit obligations and fair value of plan assets for plans with a benefit obligation in excess of plan assets:



	Pension Benefits				Other Postretirement Benefits
As of December 31,	2012		2011		2012		2011
(millions)
Benefit obligation	$	5,462	$	4,416	$	1,591	$	1,375
Fair value of plan assets	4,189		3,903		1,027		920

The following table provides information on the ABO and fair value of plan assets for pension plans with an ABO in excess of plan assets:


(1)	The increase from 2011 is primarily due to a decrease in the discount rate.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:



	Estimated Future Benefit Payments
	Pension Benefits		Other Postretirement Benefits
(millions)
2013	$	231	$	89
2014	245		93
2015	255		96
2016	300		100
2017	334		103
2018-2022	1,749		555

Plan Assets

Dominion's overall objective for investing its pension and other postretirement plan assets is to achieve the best possible long-term rates of return commensurate with prudent levels of risk. To minimize risk, funds are broadly diversified among asset classes, investment strategies and investment advisors. The strategic target asset allocations for its pension funds are 28% U.S. equity, 18% non-U.S. equity, 33% fixed income, 3% real estate and 18% other alternative investments. U.S. equity includes investments in large-cap, mid-cap and small-cap companies located in the United States. Non-U.S. equity includes investments in large-cap and small-cap companies located outside of the United States including both developed and emerging markets. Fixed income includes corporate debt instruments of companies from diversified industries and U.S. Treasuries. The U.S. equity, non-U.S. equity and fixed income investments are in individual securities as well as mutual funds. Real estate includes equity REITs and investments in partnerships. Other alternative investments include partnership investments in private equity, debt and hedge funds that follow several different strategies.

Strategic investment policies are established for Dominion's prefunded benefit plans based upon periodic asset/liability studies. Factors considered in setting the investment policy include employee demographics, liability growth rates, future discount rates, the funded status of the plans and the expected long-term rate of return on plan assets. Deviations from the plans' strategic allocation are a function of Dominion's assessments regarding short-term risk and reward opportunities in the capital markets and/or short-term market movements which result in the plans' actual asset allocations varying from the strategic target asset allocations. Through periodic rebalancing, actual allocations are brought back in line with the target. Future asset/liability studies will focus on strategies to further reduce pension and other postretirement plan risk, while still achieving attractive levels of returns. Financial derivatives may be used to obtain or manage market exposures and to hedge assets and liabilities.

For fair value measurement policies and procedures related to pension and other postretirement benefit plan assets, see Note 6.

The fair values of Dominion's pension plan assets by asset category are as follows:



	Fair Value Measurements
	Pension Plans
At December 31,	2012								2011
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
(millions)
Cash equivalents	$	—	$	195	—		$	195	1		$	84	—		$	85
U.S. equity:
Large Cap	927		104		—		1,031		805		123		—		928
Other	425		99		—		524		359		197		—		556
Non-U.S. equity:
Large Cap	313		68		—		381		253		58		—		311
Other	228		167		—		395		190		81		—		271
Fixed income:
Corporate debt instruments	27		1,026		—		1,053		36		834		—		870
U.S. Treasury securities and agency debentures	331		304		—		635		304		392		—		696
State and municipal	1		71		—		72		2		77		—		79
Other securities	5		43		—		48		8		40		—		48
Real estate:
REITs	29		—		—		29		16		—		—		16
Partnerships	—		—		321		321		—		—		304		304
Other alternative investments:
Private equity	—		—		456		456		—		—		448		448
Debt	—		—		192		192		—		—		243		243
Hedge funds	—		—		221		221		—		—		290		290
Total	$	2,286	$	2,077	$	1,190	$	5,553	$	1,974	$	1,886	$	1,285	$	5,145

The fair values of Dominion's other postretirement plan assets by asset category are as follows:



	Fair Value Measurements
	Other Postretirement Plans
At December 31,	2012								2011
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
(millions)
Cash equivalents	$	—	$	13	$	—	$	13	$	—	$	5	$	—	$	5
U.S. equity:
Large Cap	378		5		—		383		38		288		—		326
Other	21		45		—		66		17		44		—		61
Non-U.S. equity:
Large Cap	93		3		—		96		77		3		—		80
Other	11		8		—		19		9		4		—		13
Fixed income:
Corporate debt instruments	1		160		—		161		2		149		—		151
U.S. Treasury securities and agency debentures	16		266		—		282		14		246		—		260
State and municipal	—		9		—		9		—		6		—		6
Other securities	—		2		—		2		—		2		—		2
Real estate:
REITs	1		—		—		1		1		—		—		1
Partnerships	—		—		24		24		—		—		24		24
Other alternative investments:
Private equity	—		—		58		58		—		—		63		63
Debt	—		—		31		31		—		—		36		36
Hedge funds	—		—		11		11		—		—		14		14
Total	$	521	$	511	$	124	$	1,156	$	158	$	747	$	137	$	1,042

The following table presents the changes in Dominion's pension and other postretirement plan assets that are measured at fair value and included in the Level 3 fair value category:



	Fair Value Measurements using Significant Unobservable Inputs (Level 3)
	Pension Plans															Other Postretirement Plans
	Real Estate			Private Equity			Debt			Hedge Funds			Total			Real Estate			Private Equity			Debt			Hedge Funds			Total
Balance at December 31, 2009	$	344		$	344		$	241		$	388		$	1,317		$	26		$	54		$	36		$	19		$	135
Actual return on plan assets:
Relating to assets still held at the reporting date	8			56			27			27			118			—			9			2			1			12
Purchases	56			90			36			—			182			3			9			8			—			20
Sales	(137		)	(90		)	(42		)	(70		)	(339		)	(7		)	(11		)	(6		)	(3		)	(27		)
Balance at December 31, 2010	$	271		$	400		$	262		$	345		$	1,278		$	22		$	61		$	40		$	17		$	140
Actual return on plan assets:
Relating to assets still held at the reporting date	38			70			10			10			128			3			11			1			—			15
Relating to assets sold during the period	(8		)	(34		)	(10		)	(15		)	(67		)	—			(4		)	(1		)	(1		)
Purchases	57			76			34			48			215			3			8			3			2			16
Sales	(54		)	(64		)	(53		)	(98		)	(269		)	(4		)	(13		)	(7		)	(4		)	(28		)
Balance at December 31, 2011	$	304		$	448		$	243		$	290		$	1,285		$	24		$	63		$	36		$	14		$	137
Actual return on plan assets:
Relating to assets still held at the reporting date	21			46			17			21			105			1			3			4			1			9
Relating to assets sold during the period	(8		)	(41		)	(11		)	(2		)	(62		)	—			(1		)	—			—			(1		)
Purchases	35			79			15			—			129			2			6			1			—			9
Sales	(31		)	(76		)	(72		)	(88		)	(267		)	(3		)	(13		)	(10		)	(4		)	(30		)
Balance at December 31, 2012	$	321		$	456		$	192		$	221		$	1,190		$	24		$	58		$	31		$	11		$	124

Net Periodic Benefit Cost

The components of the provision for net periodic benefit cost and amounts recognized in other comprehensive income and regulatory assets and liabilities are as follows:



	Pension Benefits									Other Postretirement Benefits
Year Ended December 31,	2012			2011			2010			2012			2011			2010
(millions, except percentages)
Service cost	$	116		$	108		$	102		$	44		$	48		$	56
Interest cost	268			258			266			79			94			101
Expected return on plan assets	(430		)	(440		)	(410		)	(79		)	(79		)	(69		)
Amortization of prior service (credit) cost	3			3			3			(13		)	(13		)	(7		)
Amortization of net actuarial loss	132			96			59			6			12			12
Settlements and curtailments⁽¹⁾	—			—			136			(4		)	1			37
Special termination benefits⁽²⁾	—			—			10			—			—			1
Net periodic benefit (credit) cost	$	89		$	25		$	166		$	33		$	63		$	131
Changes in plan assets and benefit obligations recognized in other comprehensive income and regulatory assets and liabilities:
Current year net actuarial (gain) loss	$	786		$	534		$	95		$	139		$	(157	)	$	13
Prior service (credit) cost	—			—			1			1			(70		)	—
Settlements and curtailments⁽¹⁾	—			—			(50		)	(2		)	(1		)	(1		)
Less amounts included in net periodic benefit cost:
Amortization of net actuarial loss	(132		)	(96		)	(59		)	(6		)	(12		)	(12		)
Amortization of prior service credit (cost)	(3		)	(3		)	(3		)	13			13			7
Total recognized in other comprehensive income and regulatory assets and liabilities	$	651		$	435		$	(16	)	$	145		$	(227	)	$	7
Significant assumptions used to determine periodic cost:
Discount rate	5.5		%	5.9		%	6.6		%	5.5		%	5.9		%	6.6		%
Expected long-term rate of return on plan assets	8.5		%	8.5		%	8.5		%	7.75		%	7.75		%	7.75		%
Weighted average rate of increase for compensation	4.21		%	4.61		%	4.76		%	4.22		%	4.62		%	4.79		%
Healthcare cost trend rate⁽³⁾										7		%	7		%	7		%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)⁽³⁾										4.6		%	4.6		%	4.6		%
Year that the rate reaches the ultimate trend rate⁽³⁾										2061			2060			2060


(1)	2012 amounts relate to the sale of Salem Harbor. 2010 amounts relate to the sales of Peoples and Dominion's Appalachian E&P operations and a workforce reduction program.


(2)	Represents a one-time special termination benefit for certain employees in connection with a workforce reduction program.


(3)	Assumptions used to determine periodic cost for the following year.

The components of AOCI and regulatory assets and liabilities that have not been recognized as components of periodic benefit cost are as follows:



	Pension Benefits				Other Postretirement Benefits
At December 31,	2012		2011		2012			2011
(millions)
Net actuarial loss	$	2,865	$	2,211	$	230		$	100
Prior service (credit) cost	11		14		(71		)	(86		)
Total⁽¹⁾	$	2,876	$	2,225	$	159		$	14

(1)

As of December 31, 2012, of the $2.9 billion and $158 million related to pension benefits and other postretirement benefits, $1.8 billion and$69 million, respectively, are included in AOCI, with the remainder included in regulatory assets and liabilities. As of December 31, 2011, of the $2.2 billion related to pension benefits, $1.4 billion is included in AOCI, with the remainder included in regulatory assets and liabilities; the $14 million related to other postretirement benefits consists of $16 million included in regulatory assets and liabilities and $(2) million included in AOCI.

The following table provides the components of AOCI and regulatory assets and liabilities as of December 31, 2012 that are expected to be amortized as components of periodic benefit cost in 2013:

Dominion determines the expected long-term rates of return on plan assets for its pension plans and other postretirement benefit plans by using a combination of:


•	Expected inflation and risk-free interest rate assumptions;


•	Historical return analysis to determine long term historic returns as well as historic risk premiums for various asset classes;


•	Expected future risk premiums, asset volatilities and correlations;


•	Forecasts of an independent investment advisor;


•	Forward-looking return expectations derived from the yield on long-term bonds and the expected long-term returns of major stock market indices; and


•	Investment allocation of plan assets.

Dominion determines discount rates from analyses of AA/Aa rated bonds with cash flows matching the expected payments to be made under its plans.

Assumed healthcare cost trend rates have a significant effect on the amounts reported for Dominion's retiree healthcare plans. A one percentage point change in assumed healthcare cost trend rates would have had the following effects:



	Other Postretirement Benefits
	One percentage point increase		One percentage point decrease
(millions)
Effect on total of service and interest cost components for 2012	$	17	$	(16	)
Effect on other postretirement benefit obligation at December 31, 2012	218		(172		)

An internal committee selects the final assumptions used for Dominion's pension and other postretirement plans, including discount rates, expected long-term rates of return and healthcare cost trend rates.

Defined Contribution Plans

In addition, Dominion sponsors defined contribution employee savings plans. During 2012, 2011 and 2010, Dominion recognized $40 million, $38 million and $39 million, respectively, as employer matching contributions to these plans.

VIRGINIA POWER

Virginia Power participates in the Dominion Pension Plan, a defined benefit pension plan sponsored by Dominion that provides benefits to multiple Dominion subsidiaries. Retirement benefits payable under this plan are based primarily on years of service, age and the employee's compensation. As a participating employer, Virginia Power is subject to Dominion's funding policy, which is to contribute annually an amount that is in accordance with the provisions of ERISA. During 2012 Virginia Power made no contributions to the plan and no contributions are currently expected in 2013. Virginia Power's net periodic pension cost related to this pension plan was $72 million, $50 million and $84 million in 2012, 2011 and 2010, respectively. Employee compensation is the basis for determining Virginia Power's share of total pension costs.

Virginia Power also participates in the Dominion Retiree Health and Welfare Plan, a plan sponsored by Dominion that provides certain retiree healthcare and life insurance benefits to multiple Dominion subsidiaries. Annual employee premiums are based on several factors such as age, retirement date and years of service. Virginia Power's net periodic benefit cost related to this plan was $13 million, $23 million and $59 million in 2012, 2011 and 2010, respectively. Employee headcount is the basis for determining Virginia Power's share of total other postretirement benefit costs.

Certain regulatory authorities have held that amounts recovered in rates for other postretirement benefits, in excess of benefits actually paid during the year, must be deposited in trust funds dedicated for the sole purpose of paying such benefits. Accordingly, Virginia Power funds other postretirement benefit costs through a VEBA. Virginia Power made no contributions to the VEBA in 2012 and does not expect to contribute to the VEBA in 2013.

Dominion holds investments in trusts to fund employee benefit payments for its pension and other postretirement benefit plans, in which Virginia Power's employees participate. Any investment-related declines in these trusts will result in future increases in the periodic cost recognized for such employee benefit plans and will be included in the determination of the amount of cash that Virginia Power will provide to Dominion for its share of employee benefit plan contributions.

Virginia Power also participates in Dominion-sponsored defined contribution employee savings plans that cover substantially all employees. Employer matching contributions of $15 million were incurred in 2012 and $14 million in each of 2011 and 2010.

As of December 31,

(millions)

Accumulated benefit obligation

Fair value of plan assets