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 or similar arrangements 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:



	June 30, 2013						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		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	$	136	$	—	$	136	$	93	$	—	$	93
Commodity contracts:
Over-the-counter	286		—		286		290		—		290
Exchange	898		—		898		416		—		416
Total derivatives, subject to a master netting or similar arrangement	1,320		—		1,320		799		—		799
Total derivatives, not subject to a master netting or similar arrangement	11		—		11		29		—		29
Total⁽¹⁾	$	1,331	$	—	$	1,331	$	828	$	—	$	828

(1)

At June 30, 2013, the total derivative asset balance contains $1,046 million of current assets, $1,040 million and $6 million of which is presented in current derivative assets and assets held for sale, respectively, in Dominion’s Consolidated Balance Sheet, and $285 million of noncurrent assets, which is presented in other deferred charges and other assets in Dominion’s Consolidated Balance Sheet. At December 31, 2012, 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 assets, which is presented in other deferred charges and other assets in Dominion’s Consolidated Balance Sheet.



			June 30, 2013								December 31, 2012
			Gross Amounts Not Offset in the 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		Net Amounts of Assets Presented in the Consolidated Balance Sheet		Financial Instruments		Cash Collateral Received		Net Amounts
(millions)
Interest rate contracts:
Over-the-counter	$	136	$	1	$	—	$	135	$	93	$	19	$	—	$	74
Commodity contracts:
Over-the-counter	286		97		—		189		290		97		—		193
Exchange	898		855		2		41		416		350		4		62
Total	$	1,320	$	953	$	2	$	365	$	799	$	466	$	4	$	329



	June 30, 2013						December 31, 2012
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Liabilities Presented in the Consolidated Balance Sheet		Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Liabilities Presented in the Consolidated Balance Sheet
(millions)
Interest rate contracts:
Over-the-counter	$	1	$	—	$	1	$	66	$	—	$	66
Commodity contracts:
Over-the-counter	179		—		179		191		—		191
Exchange	912		—		912		393		—		393
Total derivatives, subject to a master netting or similar arrangement	1,092		—		1,092		650		—		650
Total derivatives, not subject to a master netting or similar arrangement	8		—		8		11		—		11
Total⁽¹⁾	$	1,100	$	—	$	1,100	$	661	$	—	$	661

(1)

At June 30, 2013, the total derivative liability balance contains $950 million of current liabilities, which is presented in current derivative liabilities in Dominion’s Consolidated Balance Sheet, and $150 million of noncurrent liabilities, which is presented in the other deferred credits and other liabilities in Dominion’s Consolidated Balance Sheet. At December 31, 2012, 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.



			June 30, 2013								December 31, 2012
			Gross Amounts Not Offset in the 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		Net Amounts of Liabilities Presented in the Consolidated Balance Sheet		Financial Instruments		Cash Collateral Paid		Net Amounts
(millions)
Interest rate contracts:
Over-the-counter	$	1	$	1	$	—	$	—	$	66	$	19	$	—	$	47
Commodity contracts:
Over-the-counter	179		97		23		59		191		97		20		74
Exchange	912		855		57		—		393		350		43		—
Total	$	1,092	$	953	$	80	$	59	$	650	$	466	$	63	$	121

The following table presents the volume of Dominion’s derivative activity as of June 30, 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⁾	222		38
Basis	723		459
Electricity (MWh):
Fixed price⁽¹⁾	20,165,120		14,488,783
FTRs	91,445,833		459,947
Capacity (MW)	217,575		48,886
Liquids (Gal)⁽²⁾	158,508,000		72,912,000
Interest rate	$	1,750,000,000	$	1,350,000,000


(1)	Includes options.


(2)	Includes NGLs and oil.

For the three and six months ended June 30, 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 June 30, 2013:



	AOCI After-Tax			Amounts Expected to be Reclassified to Earnings during the next 12 Months After-Tax			Maximum Term
(millions)
Commodities:
Gas	$	(7	)	$	(5	)	31 months
Electricity	69			19			30 months
Other	20			13			35 months
Interest rate	(113		)	(22		)	355 months
Total	$	(31	)	$	5

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)
June 30, 2013
ASSETS
Current Assets
Commodity	$	117	$	832	$	949
Interest rate	97		—		97
Total current derivative assets⁽¹⁾	214		832		1,046
Noncurrent Assets
Commodity	120		126		246
Interest rate	39		—		39
Total noncurrent derivative assets⁽²⁾	159		126		285
Total derivative assets	$	373	$	958	$	1,331
LIABILITIES
Current Liabilities
Commodity	$	76	$	873	$	949
Interest rate	1		—		1
Total current derivative liabilities	77		873		950
Noncurrent Liabilities
Commodity	36		114		150
Total noncurrent derivative liabilities⁽³⁾	36		114		150
Total derivative liabilities	$	113	$	987	$	1,100
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)	$6 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 June 30, 2013
Derivative Type and Location of Gains (Losses)
Commodity:
Operating revenue				$	29
Total commodity	$	131		$	29		$	(8	)
Interest rate⁽³⁾	67			(3		)	36
Total	$	198		$	26		$	28
Three Months Ended June 30, 2012
Derivative Type and Location of Gains (Losses)
Commodity:
Operating revenue				$	63
Purchased gas				(17		)
Electric fuel and other energy-related purchases				(5		)
Total commodity	$	111		$	41		$	9
Interest rate⁽³⁾	(108		)	1			(68		)
Total	$	3		$	42		$	(59	)
Six Months Ended June 30, 2013
Derivative Type and Location of Gains (Losses)
Commodity:
Operating revenue				$	(55	)
Purchased gas				(34		)
Electric fuel and other energy-related purchases				(3		)
Total commodity	$	(27	)	$	(92	)	$	(1	)
Interest rate⁽³⁾	81			(6		)	52
Total	$	54		$	(98	)	$	51
Six Months Ended June 30, 2012
Derivative Type and Location of Gains (Losses)
Commodity:
Operating revenue				$	127
Purchased gas				(47		)
Electric fuel and other energy-related purchases				(12		)
Total commodity	$	287		$	68		$	8
Interest rate⁽³⁾	(76		)	2			(41		)
Total	$	211		$	70		$	(33	)


(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 June 30,						Six Months Ended June 30,
Derivatives not designated as hedging instruments	2013			2012			2013			2012
(millions)
Derivative Type and Location of Gains (Losses)
Commodity
Operating revenue	$	(6	)	$	34		$	(3	)	$	103
Purchased gas	(26		)	5			(7		)	(5		)
Electric fuel and other energy-related purchases	(11		)	(9		)	(8		)	(36		)
Interest rate⁽²⁾	—			9						7
Total	$	(43	)	$	39		$	(18	)	$	69


(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 tables below present Virginia Power's derivative asset and liability balances by type of financial instrument, before and after the effects of offsetting:



	June 30, 2013						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		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	$	43	$	—	$	43	$	—	$	—	$	—
Commodity contracts:
Over-the-counter	1		—		1		6		—		6
Total derivatives, subject to a master netting or similar arrangement	44		—		44		6		—		6
Total derivatives, not subject to a master netting or similar arrangement	—		—		—		—		—		—
Total⁽¹⁾	$	44	$	—	$	44	$	6	$	—	$	6


(1)	At June 30, 2013, the total derivative asset balance contains $44 million of current assets, which is presented in other current assets in Virginia Power’s Consolidated Balance Sheet. At December 31, 2012, the total derivative asset balance contains $6 million of current assets, which is presented in other current assets in Virginia Power’s Consolidated Balance Sheet.



			June 30, 2013								December 31, 2012
			Gross Amounts Not Offset in the 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		Net Amounts of Assets Presented in the Consolidated Balance Sheet		Financial Instruments		Cash Collateral Received		Net Amounts
(millions)
Interest rate contracts:
Over-the-counter	$	43	$	1	$	—	$	42	$	—	$	—	$	—	$	—
Commodity contracts:
Over-the-counter	1		1		—		—		6		3		—		3
Total	$	44	$	2	$	—	$	42	$	6	$	3	$	—	$	3



	June 30, 2013						December 31, 2012
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Liabilities Presented in the Consolidated Balance Sheet		Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Liabilities Presented in the Consolidated Balance Sheet
(millions)
Interest rate contracts:
Over-the-counter	$	1	$	—	$	1	$	25	$	—	$	25
Commodity contracts:
Over-the-counter	31		—		31		7		—		7
Exchange	1		—		1		2		—		2
Total derivatives, subject to a master netting or similar arrangement	33		—		33		34		—		34
Total derivatives, not subject to a master netting or similar arrangement	—		—		—		—		—		—
Total⁽¹⁾	$	33	$	—	$	33	$	34	$	—	$	34

(1)

At June 30, 2013, the total derivative liability balance contains $33 million of current liabilities, which is presented in other current liabilities in Virginia Power’s Consolidated Balance Sheet. At December 31, 2012, the total derivative liability balance contains $33 million of current liabilities, which is presented in other current liabilities in Virginia Power’s Consolidated Balance Sheet and $1 million of noncurrent derivative liabilities, which is presented in other deferred credits and other liabilities in Virginia Power’s Consolidated Balance Sheet.



			June 30, 2013								December 31, 2012
			Gross Amounts Not Offset in the 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		Net Amounts of Liabilities Presented in the Consolidated Balance Sheet		Financial Instruments		Cash Collateral Paid		Net Amounts
(millions)
Interest rate contracts:
Over-the-counter	$	1	$	1	$	—	$	—	$	25	$	—	$	—	$	25
Commodity contracts:
Over-the-counter	31		1		23		7		7		3		—		4
Exchange	1		—		1		—		2		—		2		—
Total	$	33	$	2	$	24	$	7	$	34	$	3	$	2	$	29

The following table presents the volume of Virginia Power’s derivative activity as of June 30, 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	18		—
Basis	9		—
Electricity (MWh):
Fixed price	491,200		—
FTRs	89,107,999		—
Capacity (MW)	167,500		18,300
Interest rate	$	900,000,000	$	—

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)
June 30, 2013
ASSETS
Current Assets
Commodity	$	—	$	1	$	1
Interest rate	43		—		43
Total current derivative assets⁽¹⁾	43		1		44
Total derivative assets	$	43	$	1	$	44
LIABILITIES
Current Liabilities
Commodity	$	6	$	26	$	32
Interest rate	1		—		1
Total current derivative liabilities⁽²⁾	7		26		33
Total derivative liabilities	$	7	$	26	$	33
December 31, 2012
ASSETS
Current Assets
Commodity	$	1	$	5	$	6
Total current derivative assets⁽¹⁾	1		5		6
Total derivative assets	$	1	$	5	$	6
LIABILITIES
Current Liabilities
Commodity	$	5	$	3	$	8
Interest rate	25		—		25
Total current derivative liabilities⁽²⁾	30		3		33
Noncurrent Liabilities
Commodity	1		—		1
Total noncurrent derivative liabilities⁽³⁾	1		—		1
Total derivative liabilities	$	31	$	3	$	34


(1)	Current derivative assets are presented in other current assets in Virginia Power's Consolidated Balance Sheet.


(2)	Current derivative liabilities are presented in other current liabilities in Virginia Power's Consolidated Balance Sheet.


(3)	Noncurrent derivative liabilities are presented in other deferred credits and other liabilities in Virginia Power’s Consolidated Balance Sheet.

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 June 30, 2013
Derivative Type and Location of Gains (Losses)
Commodity:
Electric fuel and other energy-related purchases				$	—
Total commodity	$	(2	)	—			$	(8	)
Interest rate⁽³⁾	4			—			36
Total	$	2		$	—		$	28
Three Months Ended June 30, 2012
Derivative Type and Location of Gains (Losses)
Commodity:
Electric fuel and other energy-related purchases				$	(1	)
Total commodity	$	1		(1		)	$	9
Interest rate⁽³⁾	(5		)	—			(68		)
Total	$	(4	)	$	(1	)	$	(59	)
Six Months Ended June 30, 2013
Derivative Type and Location of Gains (Losses)
Commodity:
Electric fuel and other energy-related purchases				$	—
Total commodity	$	(1	)	—			$	(1	)
Interest rate⁽³⁾	6			—			52
Total	$	5		$	—		$	51
Six Months Ended June 30, 2012
Derivative Type and Location of Gains (Losses)
Commodity:
Electric fuel and other energy-related purchases				$	(3	)
Total commodity	$	(1	)	(3		)	$	8
Interest rate⁽³⁾	(4		)	—			(41		)
Total	$	(5	)	$	(3	)	$	(33	)


(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.



	Amount of Gain (Loss) Recognized in Income on Derivatives⁽¹⁾
	Three Months Ended June 30,						Six Months Ended June 30,
Derivatives not designated as hedging instruments	2013			2012			2013			2012
(millions)
Derivative Type and Location of Gains (Losses)
Commodity⁽²⁾	$	(6	)	$	(19	)	$	(3	)	$	(46	)
Interest rate⁽³⁾	—			1			—			(1		)
Total	$	(6	)	$	(18	)	$	(3	)	$	(47	)


(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 recorded in Virginia Power's Consolidated Statements of Income are classified in electric fuel and other energy-related purchases.


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