UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
For the quarterly period ended March 31, 2011
or
For the transition period from to
Commission File
Number
Exact name of registrants as specified in their charters, address of
principal executive offices and registrants’ telephone number
I.R.S. Employer
Identification Number
120 Tredegar Street
Richmond, Virginia 23219
(804) 819-2000
State or other jurisdiction of incorporation or organization of the registrants: Virginia
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Dominion Resources, Inc. Yes x No ¨ Virginia Electric and Power Company Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Dominion Resources, Inc. Yes x No ¨ Virginia Electric and Power Company Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Dominion Resources, Inc.
Virginia Electric and Power Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Dominion Resources, Inc. Yes ¨ No x Virginia Electric and Power Company Yes ¨ No x
At March 31, 2011, the latest practicable date for determination, Dominion Resources, Inc. had 575,797,529 shares of common stock outstanding and Virginia Electric and Power Company had 274,723 shares of common stock outstanding. Dominion Resources, Inc. is the sole holder of Virginia Electric and Power Company’s common stock.
This combined Form 10-Q represents separate filings by Dominion Resources, Inc. and Virginia Electric and Power Company. Information contained herein relating to an individual registrant is filed by that registrant on its own behalf. Virginia Electric and Power Company makes no representations as to the information relating to Dominion Resources, Inc.’s other operations.
COMBINED INDEX
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GLOSSARY OF TERMS
The following abbreviations or acronyms used in this Form 10-Q are defined below:
Abbreviation or Acronym
Definition
2009 Base Rate Review
Order entered by the Virginia Commission in January 2009, pursuant to the Regulation Act, initiating reviews of the base rates and terms and conditions of all investor-owned utilities in Virginia
AFUDC
Allowance for funds used during construction
AOCI
Accumulated other comprehensive income (loss)
ARO
Asset retirement obligation
ASLB
Atomic Safety and Licensing Board
bcf
Billion cubic feet
Bear Garden
A 580 MW combined cycle, natural gas-fired power station under construction in Buckingham County, Virginia
BP
BP Wind Energy North America Inc.
BREDL
Blue Ridge Environmental Defense League
CEO
Chief Executive Officer
CFO
Chief Financial Officer
CO2
Carbon dioxide
COL
Combined Construction Permit and Operating License
Companies
Dominion and Virginia Power, collectively
CONSOL
CONSOL Energy, Inc.
DEI
Dominion Energy, Inc.
Dominion
The legal entity, Dominion Resources, Inc., one or more of Dominion Resources, Inc.’s consolidated subsidiaries (other than Virginia Power) or operating segments or the entirety of Dominion Resources, Inc. and its consolidated subsidiaries
Dominion Direct®
A dividend reinvestment and open enrollment direct stock purchase plan
DRS
Dominion Resources Services, Inc.
DSM
Demand-side management
DTI
Dominion Transmission, Inc.
DVP
Dominion Virginia Power operating segment
East Ohio
The East Ohio Gas Company, doing business as Dominion East Ohio
E&P
Exploration & production
EPA
Environmental Protection Agency
EPS
Earnings per share
Fairless
Fairless power station
FERC
Federal Energy Regulatory Commission
Fowler Ridge
A wind-turbine facility joint venture between Dominion and BP Alternative Energy, Inc. in Benton County, Indiana
FTRs
Financial transmission rights
GAAP
U.S. generally accepted accounting principles
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GHG
Greenhouse gas
INPO
Institute of Nuclear Power Operations
ISO
Independent system operator
Kewaunee
Kewaunee nuclear power station
kV
Kilovolt
LNG
Liquefied natural gas
mcf
Million cubic feet
MD&A
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Medicare Act
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
Medicare Part D
Prescription drug benefit introduced in the Medicare Act
Millstone
Millstone nuclear power station
Moody’s
Moody’s Investors Service
Mt. Storm-to-Doubs Line
A 99-mile 500-kV transmission line in Virginia, West Virginia and Maryland
MW
Megawatt
MWh
Megawatt hour
NAAQS
National Ambient Air Quality Standards
NedPower
A wind-turbine facility joint venture between Dominion and Shell WindEnergy Inc. in Grant County, West Virginia
NGLs
Natural gas liquids
North Anna
North Anna nuclear power station
NOX
Nitrogen oxide
NO2
Nitrogen dioxide
NRC
Nuclear Regulatory Commission
ODEC
Old Dominion Electric Cooperative
Ohio Commission
Public Utilities Commission of Ohio
Peoples
The Peoples Natural Gas Company
PIPP
Percentage of Income Payment Plan
PIR
Pipeline Infrastructure Replacement program deployed by East Ohio
PJM
PJM Interconnection, LLC
PNG Companies LLC
An indirect subsidiary of SteelRiver Infrastructure Fund North America
Regulation Act
Legislation effective July 1, 2007, that amended the Virginia Electric Utility Restructuring Act and fuel factor statute, which legislation is also known as the Virginia Electric Utility Regulation Act
Riders C1 and C2
Rate adjustment clauses associated with the recovery of costs related to certain DSM programs
Rider R
A rate adjustment clause associated with the recovery of costs related to Bear Garden
Rider S
A rate adjustment clause associated with the recovery of costs related to the Virginia City Hybrid Energy Center
Rider T
A rate adjustment clause associated with the recovery of certain electric transmission-related expenditures
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ROE
Return on equity
RTO
Regional transmission organization
SEC
Securities and Exchange Commission
SO2
Sulfur dioxide
Standard & Poor’s
Standard & Poor’s Ratings Services, a division of the McGraw-Hill Companies, Inc.
State Line
State Line power station
U.S.
United States of America
VIE
Variable interest entity
Virginia City Hybrid Energy Center
A 585 MW baseload carbon-capture compatible, clean coal powered electric generation facility under construction in Wise County, Virginia
Virginia Commission
Virginia State Corporation Commission
Virginia Power
The legal entity, Virginia Electric and Power Company, one or more of its consolidated subsidiaries or operating segments or the entirety of Virginia Power and its consolidated subsidiaries
Virginia Settlement Approval Order
Order issued by the Virginia Commission in March 2010 concluding Virginia Power's 2009 Base Rate Review
PAGE 5
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOMINION RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Operating Revenue
Operating Expenses
Electric fuel and other energy-related purchases
Purchased electric capacity
Purchased gas
Other operations and maintenance
Depreciation, depletion and amortization
Other taxes
Total operating expenses
Income from operations
Other income
Interest and related charges
Income from continuing operations including noncontrolling interests before income tax expense
Income tax expense
Income from continuing operations including noncontrolling interests
Loss from discontinued operations(1)
Net Income Including Noncontrolling Interests
Noncontrolling Interests
Net Income Attributable to Dominion
Amounts Attributable to Dominion:
Income from continuing operations, net of tax
Loss from discontinued operations, net of tax
Net income attributable to Dominion
Earnings Per Common Share – Basic
Income from continuing operations
Loss from discontinued operations
Earnings Per Common Share – Diluted
Dividends paid per common share
The accompanying notes are an integral part of Dominion’s Consolidated Financial Statements.
PAGE 6
CONSOLIDATED BALANCE SHEETS
ASSETS
Current Assets
Cash and cash equivalents
Customer receivables (less allowance for doubtful accounts of $28 and $26)
Other receivables (less allowance for doubtful accounts of $10 and $9)
Inventories
Derivative assets
Other
Total current assets
Investments
Nuclear decommissioning trust funds
Investment in equity method affiliates
Restricted cash equivalents
Total investments
Property, Plant and Equipment
Property, plant and equipment
Accumulated depreciation, depletion and amortization
Total property, plant and equipment, net
Deferred Charges and Other Assets
Goodwill
Regulatory assets
Total deferred charges and other assets
Total assets
PAGE 7
CONSOLIDATED BALANCE SHEETS—(Continued)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Securities due within one year
Short-term debt
Accounts payable
Accrued interest, payroll and taxes
Total current liabilities
Long-Term Debt
Long-term debt
Junior subordinated notes payable to affiliates
Enhanced junior subordinated notes
Total long-term debt
Deferred Credits and Other Liabilities
Deferred income taxes and investment tax credits
Asset retirement obligations
Regulatory liabilities
Total deferred credits and other liabilities
Total liabilities
Commitments and Contingencies (see Note 15)
Subsidiary Preferred Stock Not Subject to Mandatory Redemption
Common Shareholders’ Equity
Common stock – no par(2)
Other paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total common shareholders’ equity
Total liabilities and shareholders’ equity
PAGE 8
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31,
Operating Activities
Net income including noncontrolling interests
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:
Loss from sale of Peoples
Charges related to workforce reduction program
Depreciation, depletion and amortization (including nuclear fuel)
Other adjustments
Changes in:
Accounts receivable
Deferred fuel and purchased gas costs
Prepayments
Margin deposit assets and liabilities
Other operating assets and liabilities
Net cash provided by operating activities
Investing Activities
Plant construction and other property additions
Proceeds from the sale of Peoples
Proceeds from sale of securities
Purchases of securities
Net cash used in investing activities
Financing Activities
Repayment of short-term debt, net
Issuance and remarketing of long-term debt
Issuance of common stock
Repurchase of common stock
Common dividend payments
Subsidiary preferred dividend payments
Net cash used in financing activities
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental Cash Flow Information
Significant noncash investing activities:
Accrued capital expenditures
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VIRGINIA ELECTRIC AND POWER COMPANY
Other operations and maintenance:
Affiliated suppliers
Depreciation and amortization
Income before income tax expense
Net Income
Preferred dividends
Balance available for common stock
The accompanying notes are an integral part of Virginia Power’s Consolidated Financial Statements.
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Customer accounts receivable (less allowance for doubtful accounts of $10 and $11)
Other receivables (less allowance for doubtful accounts of $7 and $6)
Inventories (average cost method)
Accumulated depreciation and amortization
Intangible assets
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LIABILITIES AND SHAREHOLDER’S EQUITY
Payables to affiliates
Affiliated current borrowings
Preferred Stock Not Subject to Mandatory Redemption
Common Shareholder’s Equity
Accumulated other comprehensive income
Total common shareholder’s equity
Total liabilities and shareholder’s equity
PAGE 12
CONSOLIDATED STATEMENTS OF CASH FLOWS
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization (including nuclear fuel)
Affiliated accounts receivable and payable
Deferred fuel expenses
Purchases of nuclear fuel
Proceeds from sales of securities
Issuance (repayment) of affiliated current borrowings, net
Remarketing of long-term debt
Preferred dividend payments
Significant noncash investing and financing activities:
Settlement of debt and issuance of common stock to Dominion
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COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations
Dominion, headquartered in Richmond, Virginia, is one of the nation’s largest producers and transporters of energy. Dominion’s operations are conducted through various subsidiaries, including Virginia Power, a regulated public utility that generates, transmits and distributes electricity for sale in Virginia and northeastern North Carolina.
Note 2. Significant Accounting Policies
As permitted by the rules and regulations of the SEC, Dominion’s and Virginia Power’s accompanying unaudited Consolidated Financial Statements contain certain condensed financial information and exclude certain footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with GAAP. These unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2010.
In Dominion’s and Virginia Power’s opinion, the accompanying unaudited Consolidated Financial Statements contain all adjustments necessary to present fairly their financial position as of March 31, 2011 and their results of operations and cash flows for the three months ended March 31, 2011 and 2010. Such adjustments are normal and recurring in nature unless otherwise noted.
The Companies make certain estimates and assumptions in preparing their Consolidated Financial Statements in accordance with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from those estimates.
Dominion’s and Virginia Power’s accompanying unaudited Consolidated Financial Statements include, after eliminating intercompany transactions and balances, their accounts and those of their respective majority-owned subsidiaries.
The results of operations for interim periods are not necessarily indicative of the results expected for the full year. Information for quarterly periods is affected by seasonal variations in sales, rate changes, electric fuel and other energy-related purchases, purchased gas expenses and other factors.
Certain amounts in Dominion’s and Virginia Power’s 2010 Consolidated Financial Statements and Notes have been reclassified to conform to the 2011 presentation for comparative purposes. The reclassifications did not affect the Companies’ net income, total assets, liabilities, shareholders’ equity or cash flows.
Amounts disclosed for Dominion are inclusive of Virginia Power, where applicable.
Note 3. Dispositions
Sale of Appalachian E&P Operations
In April 2010, Dominion completed the sale of substantially all of its Appalachian E&P operations to a newly-formed subsidiary of CONSOL for approximately $3.5 billion. The transaction included the mineral rights to approximately 491,000 acres in the Marcellus Shale formation. Dominion retained certain oil and natural gas wells located on or near its natural gas storage fields. The transaction generated after-tax proceeds of approximately $2.2 billion and resulted in an after-tax gain of approximately $1.4 billion, which included a $134 million write-off of goodwill, recorded in the second quarter of 2010.
The results of operations for Dominion’s Appalachian E&P business are not reported as discontinued operations in the Consolidated Statements of Income since Dominion did not sell its entire U.S. cost pool.
Due to the sale, hedge accounting was discontinued for certain cash flow hedges since it became probable that the forecasted sales of natural gas would not occur. In connection with the discontinuance of hedge accounting for these contracts, Dominion recognized a $42 million ($25 million after-tax) benefit, recorded in operating revenue in its Consolidated Statement of Income, reflecting the reclassification of gains from AOCI to earnings for these contracts in March 2010.
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Sale of Peoples
In February 2010, Dominion completed the sale of Peoples to PNG Companies LLC and netted after-tax proceeds of approximately $542 million. The sale resulted in an after-tax loss of approximately $140 million, including post-closing adjustments, and a $79 million write-off of goodwill. The sale also resulted in after-tax expenses of approximately $27 million, including transaction and benefit-related costs. Prior to the sale, Peoples had income from operations of $12 million after-tax during 2010.
The following table presents selected information regarding the results of operations of Peoples, which are reported as discontinued operations in Dominion’s Consolidated Statements of Income:
Operating revenue
Loss before income taxes(1)
Note 4. Ceiling Test
Dominion follows the full cost method of accounting for its gas and oil E&P activities, which subjects capitalized costs to a quarterly ceiling test using hedge-adjusted prices. Due to the April 2010 sale of substantially all of its Appalachian E&P operations, as of March 31, 2011, Dominion no longer has any significant gas and oil properties subject to the ceiling test calculation.
At March 31, 2010, Dominion recorded a ceiling test impairment charge of $21 million ($13 million after-tax) in other operations and maintenance expense in its Consolidated Statement of Income primarily due to a decline in hedge-adjusted prices reflecting the discontinuance of hedge accounting for certain cash flow hedges, as discussed in Note 3.
Note 5. Operating Revenue
The Companies’ operating revenue consists of the following:
Electric sales:
Regulated
Nonregulated
Gas sales:
Gas transportation and storage
Total operating revenue
Regulated electric sales
PAGE 15
Note 6. Income Taxes
Continuing Operations
For continuing operations, including noncontrolling interests, the statutory U.S. federal income tax rate reconciles to Dominion’s and Virginia Power’s effective income tax rate as follows:
U.S. statutory rate
Increases (reductions) resulting from:
State taxes, net of federal benefit
Legislative changes
Other, net
Effective tax rate
Dominion’s and Virginia Power’s effective tax rates in 2010 reflect the reduction of deferred tax assets resulting from the enactment of the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of 2010 which eliminated the employer’s deduction, beginning in 2013, for that portion of its retiree prescription drug coverage cost that is being reimbursed by the Medicare Part D subsidy.
In 2010, U.S. federal legislation was enacted that allows taxpayers to fully deduct qualifying capital expenditures incurred after September 8, 2010, through the end of 2011, when placed in service before 2013, and otherwise provides an extension of the fifty percent bonus depreciation allowance for qualifying capital expenditures through 2012. At December 31, 2010, there was uncertainty about the earliest date on which construction of property by or for a taxpayer could have begun in order to qualify for the full deduction of qualifying capital expenditures. Based on guidance issued by the U.S. Treasury Department in March 2011, Dominion’s and Virginia Power’s bonus depreciation allowance for 2010 has been reduced. Accordingly, Dominion and Virginia Power recorded adjustments in March 2011 to increase their income taxes payable and decrease their deferred tax liabilities by approximately $67 million and $33 million, respectively.
As of March 31, 2011, there have been no material changes in Dominion’s and Virginia Power’s unrecognized tax benefits. See Note 6 to the Consolidated Financial Statements in Dominion’s and Virginia Power's Annual Report on Form 10-K for the year ended December 31, 2010, for a discussion of these unrecognized tax benefits, including possible changes that could reasonably occur during the next twelve months.
Discontinued Operations
Income tax expense in 2010 for Dominion's discontinued operations primarily reflects the impact of goodwill written off in the sale of Peoples that is not deductible for tax purposes and the reversal of deferred taxes for which the benefit was offset by the reversal of income tax-related regulatory assets.
Note 7. Earnings Per Share
The following table presents the calculation of Dominion’s basic and diluted EPS:
(millions, except EPS)
Average shares of common stock outstanding – Basic
Net effect of potentially dilutive securities(1)
Average shares of common stock outstanding – Diluted
PAGE 16
There were no potentially dilutive securities excluded from the calculation of diluted EPS for the three months ended March 31, 2011 and 2010.
Note 8. Comprehensive Income
The following table presents Dominion’s total comprehensive income:
(millions)
Other comprehensive income (loss):
Net other comprehensive income (loss) associated with effective portion of changes in fair value of derivatives designated as cash flow hedges, net of taxes and amounts reclassified to earnings(1)
Other, net of tax
Other comprehensive income
Comprehensive income including noncontrolling interests
Noncontrolling interests
Total comprehensive income attributable to Dominion
The following table presents Virginia Power’s total comprehensive income:
Net other comprehensive loss associated with effective portion of changes in fair value of derivatives designated as cash flow hedges, net of taxes and amounts reclassified to earnings
Other comprehensive income (loss)
Total comprehensive income
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Note 9. 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 March 31, 2011, Dominion’s and Virginia Power’s net balance of commodity derivatives categorized as Level 3 fair value measurements was a net liability of $163 million and $7 million, respectively. A hypothetical 10% increase in commodity prices would increase Dominion’s and Virginia Power’s Level 3 net liability by $73 million and $2 million, respectively, while a hypothetical 10% decrease in commodity prices would decrease Dominion’s and Virginia Power’s Level 3 net liability by $73 million and $2 million, respectively.
Non-recurring Fair Value Measurements
During March 2011, Dominion determined that it is unlikely that State Line will 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 reflects 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 potential environmental regulations that would likely require significant capital expenditures. As a result, Dominion evaluated State Line for impairment since it is more likely than not that State Line will 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. This was considered a Level 3 fair value measurement due to the use of significant unobservable inputs including estimates of future power and other commodity prices.
Recurring Fair Value Measurements
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:
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At March 31, 2011
Assets
Derivatives:
Commodity
Interest rate
Investments(1):
Equity securities:
U.S.:
Large cap
Non-U.S.:
Fixed Income:
Corporate debt instruments
U.S. Treasury securities and agency debentures
State and municipal
Cash equivalents and other
Liabilities
Interest Rate
At December 31, 2010
PAGE 19
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:
Beginning balance
Total realized and unrealized gains (losses):
Included in earnings
Included in other comprehensive income (loss)
Included in regulatory assets/liabilities
Settlements
Transfers out of Level 3
Ending balance
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
The following table presents Dominion’s gains and losses included in earnings in the Level 3 fair value category:
Three Months Ended March 31, 2011
Total gains (losses) included in earnings
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
Three Months Ended March 31, 2010
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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:
Fixed income:
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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:
The gains and losses included in earnings in the Level 3 fair value category were classified in electric fuel and other energy-related purchases expense in Virginia Power's Consolidated Statements of Income for the three months ended March 31, 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 months ended March 31, 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:
Long-term debt, including securities due within one year(2)
Subsidiary preferred stock(3)
Preferred stock(3)
Note 10. 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
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methods for derivatives.
The following table presents the volume of Dominion’s derivative activity as of March 31, 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.
Natural Gas (bcf):
Fixed price(1)
Basis
Electricity (MWh):
Capacity (MW)
Liquids (gallons)(2)
For the three months ended March 31, 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 months ended March 31, 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 March 31, 2011:
Commodities:
Gas
Electricity
Total
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 the first quarter of 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 quarter 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 $40 million ($23 million after-tax) in the three months ended March 31, 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:
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March 31, 2011
Total current derivative assets
Noncurrent Assets
Total noncurrent derivative assets(1)
Total derivative assets
LIABILITIES
Total current derivative liabilities(2)
Noncurrent Liabilities
Total noncurrent derivative liabilities(3)
Total derivative liabilities
December 31, 2010
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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
Derivative Type and Location of Gains (Losses)
Commodity:
Total commodity
Interest rate(3)
Foreign currency(4)
PAGE 25
Derivatives not designated as hedging instruments
The following table presents the volume of Virginia Power’s derivative activity as of March 31, 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.
Fixed price
The following table presents selected information related to gains on cash flow hedges included in AOCI in Virginia Power’s Consolidated Balance Sheet at March 31, 2011:
The amounts that will be reclassified from AOCI to earnings will generally be offset by the recognition of the hedged transactions (e.g., anticipated interest payments) 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.
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The following table presents the fair values of Virginia Power’s derivatives and where they are presented in its Consolidated Balance Sheets:
Total current derivative assets(1)
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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:
Commodity(2)
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Note 11. Investments
Equity and Debt Securities
Rabbi Trust Securities
Marketable equity and debt securities and cash equivalents held in Dominion’s rabbi trusts and classified as trading totaled $95 million and $93 million at March 31, 2011 and December 31, 2010, respectively. Net unrealized gains on trading securities totaled $3 million and $2 million for the three months ended March 31, 2011 and 2010, respectively. Cost-method investments held in Dominion’s rabbi trusts totaled $18 million at both March 31, 2011 and December 31, 2010.
Decommissioning Trust Securities
Dominion holds marketable equity and debt securities (classified as available-for-sale), cash equivalents and cost method investments in nuclear decommissioning trust funds to fund future decommissioning costs for its nuclear plants. Dominion’s decommissioning trust funds are summarized below.
Marketable equity securities
Large Cap
Marketable debt securities:
Corporate bonds
Cost method investments
Cash equivalents and other(2)
Marketable equity securities:
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The fair value of Dominion’s marketable debt securities held in nuclear decommissioning trust funds at March 31, 2011 by contractual maturity is as follows:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Presented below is selected information regarding Dominion’s marketable equity and debt securities held in nuclear decommissioning trust funds.
Three Months Ended
March 31,
Proceeds from sales
Realized gains(1)
Realized losses(1)
Dominion recorded other-than-temporary impairment losses on investments held in nuclear decommissioning trust funds as follows:
Total other-than-temporary impairment losses(1)
Losses recorded to decommissioning trust regulatory liability
Losses recognized in other comprehensive income (before taxes)
Net impairment losses recognized in earnings
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Virginia Power holds marketable equity and debt securities (classified as available-for-sale), cash equivalents and cost method investments in nuclear decommissioning trust funds to fund future decommissioning costs for its nuclear plants. Virginia Power’s decommissioning trust funds are summarized below.
The fair value of Virginia Power’s debt securities at March 31, 2011, by contractual maturity is as follows:
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Presented below is selected information regarding Virginia Power’s marketable equity and debt securities.
Virginia Power recorded other-than-temporary impairment losses on investments as follows:
Note 12. Regulatory Matters
Other than the following matters, there have been no significant developments regarding the pending regulatory matters disclosed in Note 14 to the Consolidated Financial Statements in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2010.
Virginia Regulation
Biennial Review
Pursuant to the Regulation Act, the Virginia Commission initiated a review of Virginia Power’s base rates, terms and conditions in 2009, including a review of Virginia Power’s earnings for test year 2008. In March 2010, the Virginia Commission issued the Virginia Settlement Approval Order, thus concluding the 2009 case and resolving open issues relating to Virginia Power’s fuel factor and Riders R, S, T, C1 and C2.
Pursuant to the Regulation Act and the Virginia Settlement Approval Order, in March 2011, Virginia Power submitted its base rate filings and accompanying schedules in support of the first biennial review of its rates, terms and conditions, as well as of its earnings for test years 2009 and 2010. As a result of the Virginia Settlement Approval Order and the Regulation Act, Virginia Power’s base rates are not subject to change based on the 2011 biennial review. The Virginia Commission will determine whether Virginia Power’s earnings for the 2009 and 2010 test years, considered as a whole, were within 50 basis points above the authorized ROE of 11.9% established in the Virginia Settlement Approval Order. If Virginia Power’s earnings for the test years are more than 50 basis points above the authorized ROE, the Virginia Commission will order a credit to customers of 60% of the earnings that exceeded an ROE of 12.4% for the biennial period. The Virginia Commission will also authorize an ROE for Virginia Power that will be applied to Riders R, S, C1 and C2 and that will also be utilized to measure base rate earnings prospectively. Virginia Power is requesting authorization of an ROE of 12.5%, inclusive of a performance incentive of 100 basis points as provided for by the Regulation Act. Pursuant to the Regulation Act, Virginia Power’s authorized ROE, exclusive of any performance or other statutory incentive, can be no lower than the average of the returns reported for the three previous years by not less than a majority of comparable utilities in the Southeastern U.S., with certain limitations as described in the Regulation Act. A final order in the 2011 biennial review for base rates must be issued no later than November 30, 2011.
Generation Riders R and S
In connection with the Bear Garden and Virginia City Hybrid Energy Center projects, in March 2011, the Virginia Commission approved annual updates for Riders R and S with revenue requirements of $78 million and $199 million, respectively, for the April 1, 2011 to March 31, 2012 rate year, utilizing the 12.3% placeholder ROE (inclusive of a 100 basis point statutory enhancement) pending the Virginia Commission’s determination in the 2011 biennial review. The approved revenue requirements for Riders R and S represent increases of approximately $14 million and $45 million, respectively, over the revenue requirements associated with the Riders R and S customer rates in effect through March 31, 2011.
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DSM Riders C1 and C2
In connection with Virginia Power’s five DSM programs approved by the Virginia Commission, in March 2011, the Virginia Commission approved the annual updates for Riders C1 and C2 with revenue requirements of approximately $6 million and $12 million, respectively, for the April 1, 2011 to March 31, 2012 rate year, utilizing an 11.3% placeholder ROE pending the Virginia Commission’s determination in the 2011 biennial review.
If the Virginia Commission’s future rate decisions, including actions relating to Virginia Power’s biennial review and rate adjustment clause filings, differ materially from Virginia Power’s expectations, it could adversely affect its results of operations, financial conditions and cash flows.
Portions of the Mt. Storm-to-Doubs line and certain associated facilities are approaching the end of their expected service lives and require replacement with new facilities to maintain reliable service. Virginia Power owns, and has been designated by PJM to rebuild, 96 miles of the line in West Virginia and Virginia, and The Potomac Edison Company owns, and has been designated by PJM to rebuild, the remaining three miles of the line in Maryland. In January 2011, Virginia Power filed an application with the Virginia Commission for approval of the rebuild project. The approval of the West Virginia Commission is not required. Subject to applicable state and federal regulatory approvals, Virginia Power’s portion of the rebuild project is expected to cost approximately $300 million and is expected to be completed by June 2015.
North Anna Power Station
Virginia Power is considering the construction of a third nuclear unit at a site located at North Anna, which Virginia Power owns along with ODEC. In February 2011, ODEC informed Virginia Power of its intent to no longer participate in the development of a potential new unit at North Anna. Virginia Power and ODEC are currently working together to finalize the terms and conditions of such withdrawal.
If Virginia Power decides to build the new unit, it must first receive a COL from the NRC, the approval of the Virginia Commission and certain environmental permits and other approvals.
The NRC is required to conduct a hearing in all COL proceedings. In August 2008, the ASLB of the NRC permitted BREDL to intervene in the proceeding. All of BREDL’s previous contentions in this proceeding have been dismissed. In October 2010, BREDL submitted two new contentions that it seeks to litigate that Virginia Power opposed. The ASLB dismissed BREDL’s additional proposed contentions in April 2011. No other persons sought to intervene in the proceeding. Absent additional admitted contentions, the mandatory NRC hearing will be uncontested with respect to other issues.
On April 14, 2011, twenty-one organizations and individuals that had previously intervened opposing various reactor licensing proceedings filed a petition requesting that the NRC suspend all decisions regarding reactor licensing and design certification pending completion of an NRC task force review of the events at Fukushima, Japan, among other requested relief. The North Anna 3 COL proceeding is one of the pending proceedings identified in this petition, and BREDL served the petition in the North Anna 3 COL proceeding on April 18, 2011. Because the NRC has indicated that any lessons learned from the Fukushima incident will be applied in due course, and because a final decision in the North Anna 3 COL proceeding is not expected until 2013, Dominion does not expect this petition to be granted or to affect the North Anna 3 COL proceeding.
Virginia Power continues to pursue various environmental permits that would be needed to support future construction and operation of a third nuclear unit at North Anna.
Ohio Regulation
In March 2011, East Ohio filed a request with the Ohio Commission to accelerate the PIR program by nearly doubling its PIR spending to more than $200 million annually. East Ohio has identified 1,450 miles of pipeline that need to be replaced, in addition to the pipeline originally identified in the PIR project scope. East Ohio requested that the Ohio Commission reauthorize the PIR program for a five-year period effective upon approval of its application.
In March 2011, the Ohio Commission approved East Ohio’s annual update of the PIPP Rider, which reflected the elimination of accumulated arrearages and projected deferred program costs of approximately $112 million for the 12-month period from April 2011 to March 2012.
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Note 13. Variable Interest Entities
As discussed in Note 16 to the Consolidated Financial Statements in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2010, certain variable pricing terms in some of the Companies’ long-term power and capacity contracts cause them to be considered variable interests in the counterparties.
Virginia Power has long-term power and capacity contracts with four non-utility generators with an aggregate summer generation capacity of approximately 870 MW. These contracts contain certain variable pricing mechanisms in the form of partial fuel reimbursement that Virginia Power considers to be variable interests. After an evaluation of the information provided by these entities, Virginia Power was unable to determine whether they were VIEs. However, the information they provided, as well as Virginia Power's knowledge of generation facilities in Virginia, enabled Virginia Power to conclude that, if they were VIEs, it would not be the primary beneficiary. This conclusion reflects Virginia Power's determination that its variable interests do not convey the power to direct the most significant activities that impact the economic performance of the entities during the remaining terms of Virginia Power's contracts and for the years the entities are expected to operate after its contractual relationships expire. The contracts expire at various dates ranging from 2015 to 2021. Virginia Power is not subject to any risk of loss from these potential VIEs other than its remaining purchase commitments which totaled $1.5 billion as of March 31, 2011. Virginia Power paid $53 million and $54 million for electric capacity and $39 million and $41 million for electric energy to these entities in the three months ended March 31, 2011 and 2010, respectively.
Virginia Power purchased shared services from DRS, an affiliated VIE, of approximately $93 million and $141 million for the three months ended March 31, 2011 and 2010, respectively. Virginia Power determined that it is not the most closely associated entity with DRS and therefore not the primary beneficiary. DRS provides accounting, legal, finance and certain administrative and technical services to all Dominion subsidiaries, including Virginia Power. Virginia Power has no obligation to absorb more than its allocated share of DRS costs.
Note 14. Significant Financing Transactions
Credit Facilities and Short-term Debt
Dominion and Virginia Power use short-term debt to fund working capital requirements and as a bridge to long-term debt financings. The levels of borrowing may vary significantly during the course of the year, depending upon the timing and amount of cash requirements not satisfied by cash from operations. In addition, Dominion utilizes cash and letters of credit to fund collateral requirements. Collateral requirements are impacted by commodity prices, hedging levels, Dominion’s credit ratings and the credit quality of its counterparties.
At March 31, 2011, Dominion’s commercial paper and letters of credit outstanding, as well as capacity available under credit facilities, were as follows:
Three-year joint revolving credit facility(1)
Three-year joint revolving credit facility(2)
Virginia Power’s short-term financing is supported by two three-year joint revolving credit facilities with Dominion. These credit facilities are being used for working capital, as support for the combined commercial paper programs of Dominion and Virginia Power and for other general corporate purposes.
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At March 31, 2011, Virginia Power’s share of commercial paper and letters of credit outstanding, as well as its capacity available under its joint credit facilities with Dominion were as follows:
In addition to the credit facility commitments disclosed above, Virginia Power also has a three-year $120 million credit facility that was entered into in September 2010. The facility, which terminates in September 2013, supports certain tax-exempt financings of Virginia Power.
Long-term Debt
In March 2011, Dominion issued $500 million of 4.45% senior notes that mature in 2021 and $400 million of 1.80% senior notes that mature in 2014. The proceeds were used for general corporate purposes including the repayment of short-term debt.
In December 2010 and September 2009, Virginia Power borrowed $100 million and $60 million, respectively, in connection with the $160 million Industrial Development Authority of Wise County Solid Waste and Sewage Disposal Revenue Bonds, Series 2009 A, which mature in 2040. Due to unfavorable market conditions, Virginia Power acquired the bonds upon issuance with the intention of remarketing them to third parties at a later time. In March 2011, the bonds were remarketed to a third party and bear interest at a variable rate for the first five years, after which they will bear interest at a market rate to be determined at that time, using a remarketing process. The proceeds will be used to finance certain qualifying facilities at the Virginia City Hybrid Energy Center. These bonds had not been remarketed and thus were not reflected on the Consolidated Balance Sheet at December 31, 2010.
Convertible Securities
At March 31, 2011, Dominion had $202 million of outstanding contingent convertible senior notes that are convertible by holders into a combination of cash and shares of Dominion’s common stock under certain circumstances. The conversion feature requires that the principal amount of each note be repaid in cash, while amounts payable in excess of the principal amount will be paid in common stock. The conversion rate is subject to adjustment upon certain events such as subdivisions, splits, combinations of common stock or the issuance to all common stock holders of certain common stock rights, warrants or options and certain dividend increases. As of March 31, 2011, the conversion rate has been adjusted, primarily due to individual dividend payments above the level paid at issuance, to 28.6128 shares of common stock per $1,000 principal amount of senior notes, which represents a conversion price of $34.95.
As of December 31, 2010, the closing price of Dominion’s common stock was not equal to or higher than 120% of the conversion price for at least 20 out of the last 30 consecutive trading days; therefore, the senior notes were not eligible for conversion during the first quarter of 2011. As of March 31, 2011, the closing price of Dominion’s common stock was equal to or higher than 120% of the conversion price for at least 20 out of the last 30 consecutive trading days; therefore, the senior notes are eligible for conversion during the second quarter of 2011.
Issuance of Common Stock
Dominion maintains Dominion Direct® and a number of employee savings plans through which employer and employee contributions may be invested in the Company's common stock. These shares may either be newly issued or purchased on the open market with proceeds contributed to these plans by employees and the Company.
Since February 2010, Dominion Direct® and the Dominion employee savings plans have been purchasing Dominion common stock on the open market with the proceeds received through these programs, rather than having additional new common shares issued.
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During the three months ended March 31, 2011, Dominion issued 513,286 shares of common stock and received cash proceeds of $17 million through the exercise of employee stock options.
Repurchase of Common Stock
Dominion expects to repurchase between $600 million and $700 million of common stock with cash tax savings resulting from the extension of the bonus depreciation allowance, which is discussed in Note 6 to the Consolidated Financial Statements in Dominion's and Virginia Power's Annual Report on Form 10-K for the year ended December 31, 2010. In the first quarter of 2011, Dominion repurchased over 6 million shares of common stock for approximately $274 million on the open market under this program, at an average price of $45.30 per share. Dominion plans to continue the repurchases over the remainder of the year.
Note 15. Commitments and Contingencies
Other than the following matters, there have been no significant developments regarding the commitments and contingencies disclosed in Note 23 to the Consolidated Financial Statements in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2010.
Guarantees
At March 31, 2011, Dominion had issued $128 million of guarantees, primarily to support equity method investees. No significant amounts related to these guarantees have been recorded. As of March 31, 2011, Dominion’s exposure under these guarantees was $52 million, primarily related to certain reserve requirements associated with non-recourse financing.
Dominion also enters into guarantee arrangements on behalf of its consolidated subsidiaries, primarily to facilitate their commercial transactions with third parties. To the extent that a liability subject to a guarantee has been incurred by one of Dominion's consolidated subsidiaries, that liability is included in its Consolidated Financial Statements. Dominion is not required to recognize liabilities for guarantees issued on behalf of its subsidiaries unless it becomes probable that it will have to perform under the guarantees. Terms of the guarantees typically end once obligations have been paid. Dominion currently believes it is unlikely that it would be required to perform or otherwise incur any losses associated with guarantees of its subsidiaries' obligations.
At March 31, 2011, Dominion had issued the following subsidiary guarantees:
Subsidiary debt(2)
Commodity transactions(3)
Lease obligation for power generation facility(4)
Nuclear obligations(5)
Other(6)
Guarantees related to certain DEI subsidiaries’ potential retrospective premiums that could be assessed if there is a nuclear incident under Dominion’s nuclear insurance programs and guarantees for a DEI subsidiary’s and Virginia Power’s commitment to buy nuclear fuel. Excludes Dominion’s agreement to provide up to $150 million and $60 million to two DEI subsidiaries to pay the operating expenses of
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Millstone and Kewaunee, respectively, in the event of a prolonged outage, as part of satisfying certain NRC requirements concerned with ensuring adequate funding for the operations of nuclear power stations.
As of March 31, 2011, Virginia Power had issued $16 million of guarantees primarily to support tax-exempt debt issued through conduits. No significant amounts related to these guarantees have been recorded.
Surety Bonds and Letters of Credit
As of March 31, 2011, Dominion had purchased $118 million of surety bonds, including $39 million at Virginia Power, and authorized the issuance of standby letters of credit by financial institutions of $113 million, including $88 million at Virginia Power, to facilitate commercial transactions by its subsidiaries with third parties. Under the terms of the surety bonds, the Companies are obligated to indemnify the respective surety bond company for any amounts paid.
Renewable Generation
Virginia Power announced it plans to convert three of its coal power plants to biomass as part of its larger strategy to diversify its portfolio in meeting customer energy needs and adding renewable energy. The power stations expected to be converted to biomass are located in Altavista, Hopewell and Southampton Counties in Virginia and will each provide approximately 50 MW of capacity. If the conversions are approved by local governments, the Virginia Department of Environmental Quality and the Virginia Commission, the power stations could begin burning renewable biomass in 2013.
Potential Kewaunee Divestiture
Dominion continually reviews its portfolio of assets to determine which assets fit strategically and support its objectives to improve return on invested capital and shareholder value. If Dominion identifies assets that do not support its objectives and believes they may be of greater value to another owner, Dominion may consider such assets for divestiture. In connection with this effort, in the first quarter of 2011, Dominion decided to pursue the sale of Kewaunee, a 556 MW nuclear merchant generation facility located in Wisconsin. If these efforts are successful, Dominion may be required to present Kewaunee's assets and liabilities that are subject to sale as held for sale in its Consolidated Balance Sheet and Kewaunee's results of operations in discontinued operations in its Consolidated Statements of Income. Held for sale classification would require that amounts be recorded at the lower of book value or sale price less costs to sell and could result in the recording of an impairment charge. Any sale of Kewaunee would be subject to the approval of Dominion's Board of Directors, as well as applicable state and federal approvals.
Note 16. Credit Risk
Credit risk is the risk of financial loss if counterparties fail to perform their contractual obligations. In order to minimize overall credit risk, credit policies are maintained, including the evaluation of counterparty financial condition, collateral requirements and the use of standardized agreements that facilitate the netting of cash flows associated with a single counterparty. In addition, counterparties may make available collateral, including letters of credit or cash held as margin deposits, as a result of exceeding agreed-upon credit limits, or may be required to prepay the transaction.
Dominion and Virginia Power maintain a provision for credit losses based on factors surrounding the credit risk of their customers, historical trends and other information. Management believes, based on credit policies and the provision for credit losses, that it is unlikely that a material adverse effect on financial position, results of operations or cash flows would occur as a result of counterparty nonperformance.
General
As a diversified energy company, Dominion transacts primarily with major companies in the energy industry and with commercial and residential energy consumers. These transactions principally occur in the Northeast, mid-Atlantic and Midwest regions of the U.S. and Texas. Dominion does not believe that this geographic concentration contributes significantly to its overall exposure to credit risk. In addition, as a result of its large and diverse customer base, Dominion is not exposed to a significant concentration of credit risk for receivables arising from electric and gas utility operations.
Dominion’s exposure to credit risk is concentrated primarily within its energy marketing and price risk management activities, as Dominion transacts with a smaller, less diverse group of counterparties and transactions may involve large notional volumes and potentially volatile commodity prices. Energy marketing and price risk management activities include trading of energy-related commodities, marketing of merchant generation output, structured transactions and the use of financial contracts for
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enterprise-wide hedging purposes. Gross credit exposure for each counterparty is calculated as outstanding receivables plus any unrealized on- or off-balance sheet exposure, taking into account contractual netting rights. Gross credit exposure is calculated prior to the application of collateral. At March 31, 2011, Dominion’s gross credit exposure totaled $493 million. After the application of collateral, credit exposure is unchanged. Of this amount, investment grade counterparties, including those internally rated, represented 83%. One counterparty exposure represents 9% of Dominion’s total exposure and is a large financial institution rated investment grade.
Virginia Power sells electricity and provides distribution and transmission services to customers in Virginia and northeastern North Carolina. Management believes that this geographic concentration risk is mitigated by the diversity of Virginia Power’s customer base, which includes residential, commercial and industrial customers, as well as rural electric cooperatives and municipalities. Credit risk associated with trade accounts receivable from energy consumers is limited due to the large number of customers. Virginia Power’s exposure to potential concentrations of credit risk results primarily from sales to wholesale customers. Virginia Power’s gross credit exposure for each counterparty is calculated as outstanding receivables plus any unrealized on- or off-balance sheet exposure, taking into account contractual netting rights. Gross credit exposure is calculated prior to the application of collateral. At March 31, 2011, Virginia Power’s exposure to potential concentrations of credit risk was not considered material.
Credit-Related Contingent Provisions
The majority of Dominion’s derivative instruments contain credit-related contingent provisions. These provisions require Dominion to provide collateral upon the occurrence of specific events, primarily a credit downgrade. If the credit-related contingent features underlying these instruments that are in a liability position and not fully collateralized with cash were fully triggered as of March 31, 2011 and December 31, 2010, Dominion would have been required to post an additional $103 million and $88 million, respectively, of collateral to its counterparties. The collateral that would be required to be posted includes the impacts of any offsetting asset positions and any amounts already posted for derivatives, non-derivative contracts and derivatives elected under the normal purchases and normal sales exception, per contractual terms. Dominion had posted $105 million in collateral, including $7 million of letters of credit at March 31, 2011 and $54 million in collateral, including $19 million of letters of credit at December 31, 2010, related to derivatives with credit-related contingent provisions that are in a liability position and not fully collateralized with cash. The collateral posted includes any amounts paid related to non-derivative contracts and derivatives elected under the normal purchases and normal sales exception, per contractual terms. The aggregate fair value of all derivative instruments with credit-related contingent provisions that are in a liability position and not fully collateralized with cash as of March 31, 2011 and December 31, 2010 was $257 million and $210 million, respectively, which does not include the impact of any offsetting asset positions. See Note 10 for further information about derivative instruments.
Note 17. Related Party Transactions
Virginia Power engages in related-party transactions primarily with other Dominion subsidiaries (affiliates). Virginia Power’s receivable and payable balances with affiliates are settled based on contractual terms or on a monthly basis, depending on the nature of the underlying transactions. Virginia Power is included in Dominion’s consolidated federal income tax return and participates in certain Dominion benefit plans. A discussion of significant related party transactions follows.
Transactions with Affiliates
Virginia Power transacts with affiliates for certain quantities of natural gas and other commodities in the ordinary course of business. Virginia Power also enters into certain commodity derivative contracts with affiliates. Virginia Power uses these contracts, which are principally comprised of commodity swaps, to manage commodity price risks associated with purchases of natural gas.
DRS provides accounting, legal, finance and certain administrative and technical services to Virginia Power. Presented below are significant transactions with DRS and other affiliates:
Commodity purchases from affiliates
Services provided by affiliates
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Virginia Power has borrowed funds from Dominion under short-term borrowing arrangements. Virginia Power’s outstanding borrowings, net of repayments, under the Dominion money pool for its nonregulated subsidiaries totaled $58 million and $24 million, as of March 31, 2011 and December 31, 2010, respectively. Virginia Power’s short-term demand note borrowings from Dominion were $79 million as of December 31, 2010. There were no short-term demand note borrowings as of March 31, 2011. Virginia Power’s interest charges related to its borrowings from Dominion were immaterial for the periods ended March 31, 2011 and 2010.
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Note 18. Employee Benefit Plans
The components of Dominion’s provision for net periodic benefit cost were as follows:
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost (credit)
Amortization of net loss
Settlements and curtailments(1)
Special termination benefits(2)
Net periodic benefit cost
Employer Contributions
During the three months ended March 31, 2011, Dominion made no contributions to its defined benefit pension plans or other postretirement benefit plans. Dominion expects to contribute approximately $18 million, of which Virginia Power’s portion is expected to be $1 million, to its other postretirement benefit plans through Voluntary Employees’ Beneficiary Associations during the remainder of 2011.
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Note 19. Operating Segments
Dominion and Virginia Power are organized primarily on the basis of products and services sold in the U.S. A description of the operations included in the Companies’ primary operating segments is as follows:
Primary Operating Segment
Description of Operations
Dominion Generation
Dominion Energy
In addition to the operating segments above, the Companies also report a Corporate and Other segment.
The Corporate and Other Segment of Dominion includes its corporate, service company and other functions (including unallocated debt) and certain specific items that are not included in profit measures evaluated by executive management in assessing segment performance or allocating resources among the segments.
In the three months ended March 31, 2011, Dominion reported after-tax net expenses of $62 million for specific items in the Corporate and Other segment, with $54 million of these net expenses attributable to its operating segments. In the three months ended March 31, 2010, Dominion reported after-tax net expenses of $402 million for specific items in the Corporate and Other segment, with $215 million of these net expenses attributable to its operating segments.
The net expenses for specific items in 2011 primarily related to the impact of the following items:
A $55 million ($39 million after-tax) impairment charge related to State Line, attributable to Dominion Generation; and
A $32 million ($19 million after-tax) loss from the operations of Kewaunee, attributable to Dominion Generation. Kewaunee's results of operations have been reflected in the Corporate and Other segment due to Dominion's decision in the first quarter of 2011 to pursue the sale of Kewaunee.
The net expenses for specific items in 2010 primarily related to the impact of the following items:
A $338 million ($206 million after-tax) charge primarily reflecting severance pay and other benefits related to a workforce reduction program, attributable to:
DVP ($67 million after-tax);
Dominion Energy ($24 million after-tax); and
Dominion Generation ($115 million after-tax); and
A $137 million ($149 million after-tax) loss from the discontinued operations of Peoples primarily reflecting a net loss on the sale, attributable to the Corporate and Other segment.
The Corporate and Other Segment of Virginia Power primarily includes certain specific items that are not included in profit measures evaluated by executive management in assessing segment performance or allocating resources among the segments. In the three months ended March 31, 2010, Virginia Power reported after-tax net expenses of $140 million for specific items attributable to its operating segments in the Corporate and Other segment. Virginia Power recorded no expenses in its Corporate and Other segment during the three months ended March 31, 2011.
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The net expenses for specific items in 2010 primarily related to the impact of the following:
A $202 million ($123 million after-tax) charge primarily reflecting severance pay and other benefits related to a workforce reduction program, attributable to:
DVP ($63 million after-tax); and
Dominion Generation ($60 million after-tax).
The following table presents segment information pertaining to Dominion’s operations:
2011
Total revenue from external customers
Intersegment revenue
Net income (loss) attributable to Dominion
2010
Intersegment sales and transfers for Dominion are based on contractual arrangements and may result in intersegment profit or loss that is eliminated in consolidation.
The following table presents segment information pertaining to Virginia Power’s operations:
Net income (loss)
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MD&A discusses Dominion’s and Virginia Power’s results of operations and general financial condition. MD&A should be read in conjunction with the Companies’ Consolidated Financial Statements.
Contents of MD&A
MD&A consists of the following information:
Forward-Looking Statements
Accounting Matters
Results of Operations
Segment Results of Operations
Liquidity and Capital Resources
Future Issues and Other Matters
This report contains statements concerning Dominion’s and Virginia Power’s expectations, plans, objectives, future financial performance and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In most cases, the reader can identify these forward-looking statements by such words as “anticipate,” “estimate,” “forecast,” “expect,” “believe,” “should,” “could,” “plan,” “may,” “target” or other similar words.
Dominion and Virginia Power make forward-looking statements with full knowledge that risks and uncertainties exist that may cause actual results to differ materially from predicted results. Factors that may cause actual results to differ are often presented with the forward-looking statements themselves. Additionally, other factors may cause actual results to differ materially from those indicated in any forward-looking statement. These factors include but are not limited to:
Unusual weather conditions and their effect on energy sales to customers and energy commodity prices;
Extreme weather and geophysical events, including earthquakes, hurricanes, tornadoes, high winds and severe storms, that can cause outages and property damage to facilities;
Federal, state and local legislative and regulatory developments;
Changes to federal, state and local environmental laws and regulations, including those related to climate change, the tightening of emission or discharge limits for GHGs and other emissions, more extensive permitting requirements and the regulation of additional substances;
Cost of environmental compliance, including those costs related to climate change;
Risks associated with the operation of nuclear facilities, including costs associated with the disposal of spent nuclear fuel, decommissioning, plant maintenance and changes in existing regulations governing such facilities;
Unplanned outages of the Companies’ facilities;
Fluctuations in energy-related commodity prices and the effect these could have on Dominion’s earnings and Dominion’s and Virginia Power’s liquidity position and the underlying value of their assets;
Counterparty credit and performance risk;
Capital market conditions, including the availability of credit and the ability to obtain financing on reasonable terms;
Risks associated with Virginia Power’s membership and participation in PJM related to obligations created by the default of other participants;
Price risk due to investments held in nuclear decommissioning trusts by Dominion and Virginia Power and in benefit plan trusts by Dominion;
Fluctuations in interest rates;
Changes in federal and state tax laws and regulations;
Changes in rating agency requirements or credit ratings and their effect on availability and cost of capital;
Changes in financial or regulatory accounting principles or policies imposed by governing bodies;
Employee workforce factors including collective bargaining agreements and labor negotiations with union employees;
The risks of operating businesses in regulated industries that are subject to changing regulatory structures;
Receipt of approvals for and timing of closing dates for acquisitions and divestitures;
Changes in rules for RTOs and ISOs in which Dominion and Virginia Power participate, including changes in rate designs and new and evolving capacity models;
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Political and economic conditions, including the threat of domestic terrorism, inflation and deflation;
Industrial, commercial and residential growth or decline in the Companies’ service areas and changes in customer growth or usage patterns, including as a result of energy conservation programs;
Additional competition in electric markets in which Dominion’s merchant generation facilities operate;
Changes in technology, particularly with respect to new, developing or alternative sources of generation and smart grid technologies;
Changes to regulated electric rates collected by Virginia Power and regulated gas distribution, transportation and storage rates, including LNG storage, collected by Dominion;
Timing and receipt of regulatory approvals necessary for planned construction or expansion projects;
The inability to complete planned construction projects within the terms and time frames initially anticipated; and
Adverse outcomes in litigation matters.
Additionally, other risks that could cause actual results to differ from predicted results are set forth in Item 1A. Risk Factors in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2010 and in Part II, Item 1A. Risk Factors in this report.
Dominion’s and Virginia Power’s forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. The Companies caution the reader not to place undue reliance on their forward-looking statements because the assumptions, beliefs, expectations and projections about future events may, and often do, differ materially from actual results. Dominion and Virginia Power undertake no obligation to update any forward-looking statement to reflect developments occurring after the statement is made.
Critical Accounting Policies and Estimates
As of March 31, 2011, there have been no significant changes with regard to the critical accounting policies and estimates disclosed in MD&A in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2010. The policies disclosed included the accounting for regulated operations, AROs, income taxes, derivative contracts and other instruments at fair value, goodwill and long-lived asset impairment testing, employee benefit plans and unbilled revenue.
See Note 9 to Dominion’s and Virginia Power’s Consolidated Financial Statements for information on fair value measurements.
Presented below is a summary of Dominion’s consolidated results:
First Quarter
Diluted EPS
Overview
First Quarter 2011 vs. 2010
Net income attributable to Dominion increased by $305 million. Favorable drivers include the absence of the following 2010 items:
Charges related to a workforce reduction program; and
A loss on the sale of Peoples.
Unfavorable drivers include lower margins from merchant generation operations and an impairment charge related to State Line.
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Analysis of Consolidated Operations
Presented below are selected amounts related to Dominion’s results of operations:
Net revenue
An analysis of Dominion’s results of operations follows:
Net revenue increased $7 million, primarily reflecting:
An $88 million increase from regulated natural gas distribution operations primarily reflecting increased rider revenue related to low income assistance programs;
A $46 million increase from electric utility operations primarily reflecting:
The impact of Riders C1 and C2, R, S and T ($47 million); and
An increase in ancillary revenues received from PJM ($7 million); partially offset by
The net impact ($14 million) of a decrease in sales to retail customers primarily due to a decrease in heating degree days ($45 million) and favorable economic conditions on customer usage and other factors ($31 million);
A $28 million increase in retail energy marketing activities primarily due to a decrease in purchased gas expense; and
A $15 million increase in producer services primarily related to higher physical margins partially offset by unfavorable price changes on economic hedging positions, all associated with natural gas aggregation, marketing and trading activities.
These increases were partially offset by:
A $106 million decrease reflecting the sale of substantially all of Dominion's Appalachian E&P operations in April 2010; and
A $66 million decrease from merchant generation operations due to a decrease at certain nuclear generation facilities ($40 million) primarily due to lower realized prices, as well as a decline in margins at certain fossil generation facilities ($26 million) largely due to decreased volumes.
Other operations and maintenance decreased 19%, primarily reflecting:
A $338 million net decrease in salaries, wages and benefits primarily due to the absence of charges recorded in 2010 related to a workforce reduction program; and
A $21 million decrease due to the absence of a ceiling test impairment charge related to the carrying value of Dominion's E&P properties that were sold in April 2010.
These decreases were partially offset by:
An $84 million increase in bad debt expense at regulated natural gas distribution operations, primarily related to low income assistance programs. These expenses are recovered through rates and do not impact net income;
A $55 million impairment charge related to State Line; and
A $16 million increase in outage costs due to an increase in scheduled outage days at certain merchant generation facilities ($32 million), partially offset by a decrease in scheduled outage days at certain electric utility generation facilities ($16 million). The outage days primarily occurred at nuclear facilities.
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Other income decreased 20% primarily due to a decrease in earnings from equity method investments ($16 million) and lower net realized gains (including investment income) on nuclear decommissioning trust funds ($11 million), partially offset by an increase in the equity component of AFUDC as a result of construction and expansion projects ($14 million).
Interest and related charges increased 24% primarily due to the absence of a benefit recorded in 2010 resulting from the discontinuance of hedge accounting for certain interest rate derivatives.
Loss from discontinued operations primarily reflects a loss on the sale of Peoples in February 2010.
Segment results include the impact of intersegment revenues and expenses, which may result in intersegment profit and loss. Presented below is a summary of contributions by Dominion’s operating segments to net income attributable to Dominion:
Primary operating segments
Corporate and Other
Consolidated
Presented below are selected operating statistics related to DVP’s operations:
Electricity delivered (million MWh)
Degree days (electric distribution service area):
Cooling(1)
Heating(2)
Average electric distribution customer accounts (thousands)(3)
Average retail energy marketing customer accounts (thousands)(3)
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Presented below, on an after-tax basis, are the key factors impacting DVP’s net income contribution:
Regulated electric sales:
Weather
FERC transmission revenue(1)
Retail energy marketing operations
Storm damage and service restoration – electric distribution operations
Interest expense
Share accretion
Change in net income contribution
Presented below are selected operating statistics related to Dominion Generation’s operations:
Electricity supplied (million MWh):
Utility
Merchant(1)
Degree days (electric utility service area):
Cooling
Heating
Presented below, on an after-tax basis, are the key factors impacting Dominion Generation’s net income contribution:
Merchant generation margin
Rate adjustment clause equity return
Kewaunee 2010 earnings(1)
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Presented below are selected operating statistics related to Dominion Energy’s operations.
Gas distribution throughput (bcf):
Sales
Transportation
Heating degree days (gas distribution service area)
Average gas distribution customer accounts (thousands)(1):
Presented below, on an after-tax basis, are the key factors impacting Dominion Energy’s net income contribution:
E&P disposed operations
Producer services margin
Presented below are the Corporate and Other segment’s after-tax results:
Specific items attributable to operating segments
Specific items attributable to corporate operations:
Peoples discontinued operations
Total specific items
Other corporate operations
Total net expense
EPS impact
Total Specific Items
Corporate and Other includes specific items that are not included in profit measures evaluated by management in assessing segment performance or in allocating resources among the segments. See Note 19 to the Consolidated Financial Statements for discussion of these items.
Other Corporate Operations
Net expenses increased $37 million primarily due to the absence of a net benefit resulting from the discontinuance of hedge accounting and subsequent changes in fair value of certain interest rate derivatives during the first quarter of 2010 and lower consolidated state income tax benefits.
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Presented below is a summary of Virginia Power’s consolidated results:
Net income increased by $183 million. The primary driver is the absence of charges related to a workforce reduction program in 2010.
Presented below are selected amounts related to Virginia Power’s results of operations:
An analysis of Virginia Power’s results of operations follows:
Net revenue increased 5%, primarily reflecting:
The impact from Riders C1 and C2, R, S and T ($47 million); and
The net impact ($14 million) of a decrease in sales to retail customers primarily due to a decrease in heating degree days ($45 million) and favorable economic conditions on customer usage and other factors ($31 million).
Other operations and maintenance decreased 42%, primarily reflecting a $216 million net decrease in salaries, wages and benefits including administrative and general costs primarily due to the absence of charges recorded in 2010 related to a workforce reduction program.
Other income increased $15 million, primarily reflecting an increase in the equity component of AFUDC as a result of construction and expansion projects.
Income tax expense increased $85 million, primarily reflecting higher pre-tax income in 2011.
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Presented below is a summary of contributions by Virginia Power’s operating segments to net income:
Presented below are operating statistics related to Virginia Power’s DVP segment:
Average electric distribution customer accounts (thousands)(1)
Presented below, on an after-tax basis, are the key factors impacting Virginia Power’s DVP segment’s net income contribution:
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Presented below are operating statistics related to Virginia Power’s Dominion Generation segment:
Presented below, on an after-tax basis, are the key factors impacting Virginia Power’s Dominion Generation segment’s net income contribution:
Outage costs
Dominion and Virginia Power depend on both internal and external sources of liquidity to provide working capital and to fund capital requirements. Short-term cash requirements not met by cash provided by operations are generally satisfied with proceeds from short-term borrowings. Long-term cash needs are met through issuances of debt and/or equity securities.
At March 31, 2011, Dominion had $2.5 billion of unused capacity under its credit facilities, including $580 million of unused capacity under joint credit facilities available to Virginia Power.
A summary of Dominion’s cash flows is presented below:
Cash and cash equivalents at January 1
Cash flows provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at March 31
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A summary of Virginia Power’s cash flows is presented below:
Operating Cash Flows
Net cash provided by Dominion’s operating activities decreased by $738 million, primarily due to higher margin collateral requirements, lower merchant generation margins, the unfavorable impact of weather and net changes in working capital items.
Net cash provided by Virginia Power’s operating activities decreased by $245 million, primarily due to lower deferred fuel cost recoveries, the unfavorable impact of weather and net changes in other working capital items.
Dominion believes that its operations provide a stable source of cash flow to contribute to planned levels of capital expenditures and maintain or grow the dividend on common shares. Virginia Power believes that its operations provide a stable source of cash flow to contribute to planned levels of capital expenditures and provide dividends to Dominion.
The Companies’ operations are subject to risks and uncertainties that may negatively impact the timing or amounts of operating cash flows, which are discussed in Item 1A. Risk Factors in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2010 and Part II, Item 1A. Risk Factors in this report.
Credit Risk
Dominion’s exposure to potential concentrations of credit risk results primarily from its energy marketing and price risk management activities. Presented below is a summary of Dominion’s credit exposure as of March 31, 2011 for these activities. Gross credit exposure for each counterparty is calculated prior to the application of collateral and represents outstanding receivables plus any unrealized on- or off-balance sheet exposure, taking into account contractual netting rights.
Investment grade(1)
Non-investment grade(2)
No external ratings:
Internally rated—investment grade(3)
Internally rated—non-investment grade(4)
Virginia Power’s exposure to potential concentrations of credit risk results primarily from sales to wholesale customers. Gross credit exposure for each counterparty is calculated prior to the application of collateral and represents outstanding receivables plus any unrealized on- or off-balance sheet exposure, taking into account contractual netting rights. At March 31, 2011, Virginia Power's exposure to potential concentrations of credit risk was not considered material.
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Investing Cash Flows
Net cash used in Dominion’s investing activities increased by $581 million, primarily reflecting the absence of the proceeds received from the sale of Peoples in February 2010.
Net cash used in Virginia Power’s investing activities decreased by $200 million, primarily due to lower capital expenditures.
Financing Cash Flows and Liquidity
Dominion and Virginia Power rely on capital markets as significant sources of funding for capital requirements not satisfied by cash provided by their operations. As discussed further in Credit Ratings and Debt Covenants in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2010, the Companies’ ability to borrow funds or issue securities and the return demanded by investors are affected by credit ratings. In addition, the raising of external capital is subject to certain regulatory requirements, including registration with the SEC and, in the case of Virginia Power, approval by the Virginia Commission.
Each of the Companies meets the definition of a well-known seasoned issuer under SEC rules governing the registration, communications and offering processes under the Securities Act of 1933. The rules provide for a streamlined shelf registration process to provide registrants with timely access to capital. This allows the Companies to use automatic shelf registration statements to register any offering of securities, other than those for business combination transactions.
Net cash used in Dominion’s financing activities decreased by $1.4 billion, primarily due to net debt issuances in 2011 compared to net debt repayments in 2010 partially reflecting the use of proceeds from the sale of Peoples.
Net cash used in Virginia Power’s financing activities decreased by $86 million, primarily due to net debt issuances/remarketings in 2011 compared to net debt repayments in 2010.
See Note 14 to the Consolidated Financial Statements for further information regarding Dominion’s and Virginia Power’s credit facilities, liquidity and significant financing transactions, including stock repurchases.
Credit Ratings
Credit ratings are intended to provide banks and capital market participants with a framework for comparing the credit quality of securities and are not a recommendation to buy, sell or hold securities. In the Credit Ratings section of MD&A in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2010, there is a discussion on the use of capital markets by the Companies, as well as the impact of credit ratings on the accessibility and costs of using these markets. As of March 31, 2011, there have been no changes in the Companies’ credit ratings.
Debt Covenants
In theDebt Covenants section of MD&A in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2010, there is a discussion on the various covenants present in the enabling agreements underlying the Companies’ debt. As of March 31, 2011, there have been no material changes to debt covenants, nor any events of default under the Companies’ debt covenants.
Future Cash Payments for Contractual Obligations and Planned Capital Expenditures
As of March 31, 2011, there have been no material changes outside the ordinary course of business to Dominion’s or Virginia Power’s contractual obligations nor any material changes to planned capital expenditures as disclosed in MD&A in the Companies’ Annual Report on Form 10-K for the year ended December 31, 2010.
Use of Off-Balance Sheet Arrangements
As of March 31, 2011, there have been no material changes in the off-balance sheet arrangements disclosed in MD&A in Dominion’s Annual Report on Form 10-K for the year ended December 31, 2010.
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The following discussion of future issues and other information includes current developments of previously disclosed matters and new issues arising during the period covered by, and subsequent to, the dates of Dominion’s and Virginia Power’s Consolidated Financial Statements that may impact the Companies’ future results of operations and/or financial condition. This section should be read in conjunction with Item 1. Business and Future Issues and Other Matters in MD&A in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2010.
Regulatory Matters
See Note 14 to the Consolidated Financial Statements in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2010 and Note 12 to the Consolidated Financial Statements in this report for additional information on various regulatory matters.
Environmental Matters
Dominion and Virginia Power are subject to costs resulting from a number of federal, state and local laws and regulations designed to protect human health and the environment. These laws and regulations affect future planning and existing operations. They can result in increased capital, operating and other costs as a result of compliance, remediation, containment and monitoring obligations. See Note 23 to the Consolidated Financial Statements in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2010 and Note 15 to the Consolidated Financial Statements in this report for additional information on various environmental matters.
Legal Matters
See Item 3. Legal Proceedings in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2010 and Part II, Item 1. Legal Proceedings in this report for additional information on various legal matters.
Nuclear Matters
In March 2011, a magnitude 9.0 earthquake and subsequent tsunami caused significant damage at the Fukushima Daiichi nuclear power station in northeast Japan. It is expected that these events will result in significant nuclear safety reviews required by the NRC, industry groups such as INPO and/or international organizations. Like other U.S. nuclear operators, Dominion is currently gathering data to respond to INPO recommendations related to the ability to respond to design-basis and beyond-design-basis events at its stations. Such reviews may impact future operations and/or capital requirements at U.S. nuclear facilities, including those owned by Dominion and Virginia Power.
Allegheny Storage Project
DTI is developing the Allegheny Storage Project, which is expected to provide approximately 7.5 bcf of incremental storage service and associated year-round transportation service to three local distribution companies under 15-year contracts. Storage capacity for the project will be provided from capacity leased from East Ohio and storage pool enhancements at DTI. To provide the 125,000 dekatherms per day of incremental firm transportation service, DTI intends to construct additional compression facilities and upgrade measurement and regulation. The Allegheny Storage Project is expected to be in service in April 2014, subject to FERC approval, which DTI plans to request later in 2011.
Tioga Area Expansion Project
In February 2011, DTI concluded a binding open season for its Tioga Area Expansion Project, which is designed to provide approximately 270,000 dekatherms per day of firm transportation service from supply interconnects in Tioga and Potter Counties in Pennsylvania to DTI's Crayne interconnect with Texas Eastern Transmission, LP in Greene County, Pennsylvania and the Leidy interconnect with Transcontinental Gas Pipe Line Company in Clinton County, Pennsylvania. Two customers have contracted for the service under 15-year terms. Subject to the receipt of regulatory approvals, the project is anticipated to be in service in November 2013.
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ITEM 3.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The matters discussed in this Item may contain “forward-looking statements” as described in the introductory paragraphs under Part I, Item 2. MD&A of this Form 10-Q. The reader’s attention is directed to those paragraphs for discussion of various risks and uncertainties that may impact Dominion and Virginia Power.
Market Risk Sensitive Instruments and Risk Management
Dominion’s and Virginia Power’s financial instruments, commodity contracts and related financial derivative instruments are exposed to potential losses due to adverse changes in commodity prices, interest rates and equity security prices as described below. Commodity price risk is present in Dominion’s and Virginia Power’s electric operations, Dominion’s gas procurement operations, and Dominion’s energy marketing and trading operations due to the exposure to market shifts in prices received and paid for electricity, natural gas and other commodities. The Companies use commodity derivative contracts to manage price risk exposures for these operations. Interest rate risk is generally related to their outstanding debt. In addition, they are exposed to investment price risk through various portfolios of equity and debt securities.
The following sensitivity analysis estimates the potential loss of future earnings or fair value from market risk sensitive instruments over a selected time period due to a 10% unfavorable change in commodity prices or interest rates.
Commodity Price Risk
To manage price risk, Dominion and Virginia Power primarily hold commodity-based financial derivative instruments for non-trading purposes associated with purchases and sales of electricity, natural gas and other energy-related products. As part of its strategy to market energy and to manage related risks, Dominion also holds commodity-based financial derivative instruments for trading purposes.
The derivatives used to manage commodity price risk are executed within established policies and procedures and may include instruments such as futures, forwards, swaps, options and FTRs that are sensitive to changes in the related commodity prices. For sensitivity analysis purposes, the hypothetical change in market prices of commodity-based financial derivative instruments is determined based on models that consider the market prices of commodities in future periods, the volatility of the market prices in each period, as well as the time value factors of the derivative instruments. Prices and volatility are principally determined based on observable market prices.
A hypothetical 10% unfavorable change in market prices of Dominion’s non-trading commodity-based financial derivative instruments would have resulted in a decrease in fair value of approximately $202 million and $183 million as of March 31, 2011 and December 31, 2010, respectively. A hypothetical 10% unfavorable change in commodity prices would not have resulted in a material change in the fair value of Dominion’s commodity-based financial derivative instruments held for trading purposes as of March 31, 2011 or December 31, 2010.
A hypothetical 10% unfavorable change in commodity prices would have resulted in a decrease of approximately $5 million and $3 million in the fair value of Virginia Power’s non-trading commodity-based financial derivatives as of March 31, 2011 and December 31, 2010, respectively.
The impact of a change in energy commodity prices on Dominion’s and Virginia Power’s non-trading commodity-based financial derivative instruments at a point in time is not necessarily representative of the results that will be realized when the contracts are ultimately settled. Net losses from commodity derivative instruments used for hedging purposes, to the extent realized, will generally be offset by recognition of the hedged transaction, such as revenue from physical sales of the commodity.
Interest Rate Risk
Dominion and Virginia Power manage their interest rate risk exposure predominantly by maintaining a balance of fixed and variable rate debt. They also enter into interest rate sensitive derivatives, including interest rate swaps and interest rate lock agreements. For variable rate debt and interest rate swaps designated under fair value hedging and outstanding for Dominion and Virginia Power, a hypothetical 10% increase in market interest rates would not have resulted in a material change in annual earnings at March 31, 2011 or December 31, 2010.
Additionally, Dominion and Virginia Power may use forward-starting interest rate swaps and interest rate lock agreements as anticipatory hedges. As of March 31, 2011, Dominion had $500 million in aggregate notional amounts of these interest rate
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derivatives outstanding. A hypothetical 10% decrease in market interest rates would not have resulted in a material change in the fair value of these interest rate derivatives at March 31, 2011. There were none of these interest rate derivatives outstanding at December 31, 2010.
Investment Price Risk
Dominion and Virginia Power are subject to investment price risk due to securities held as investments in decommissioning and rabbi trust funds that are managed by third-party investment managers. These trust funds primarily hold marketable securities that are reported in the Consolidated Balance Sheets at fair value.
Dominion recognized net realized gains (including investment income) on nuclear decommissioning and rabbi trust investments of $28 million, $58 million and $95 million for the three months ended March 31, 2011 and 2010 and for the year ended December 31, 2010, respectively. Net realized gains and losses include gains and losses from the sale of investments as well as any other-than-temporary declines in fair value. For the three months ended March 31, 2011 and 2010 and the year ended December 31, 2010, Dominion recorded, in AOCI and regulatory liabilities, a net increase in unrealized gains on these investments of $96 million, $54 million and $182 million, respectively.
Virginia Power recognized net realized gains (including investment income) on nuclear decommissioning trust investments of $8 million, $28 million and $44 million for the three months ended March 31, 2011 and 2010 and for the year ended December 31, 2010, respectively. Net realized gains and losses include gains and losses from the sale of investments as well as any other-than-temporary declines in fair value. Virginia Power recorded, in AOCI and regulatory liabilities, a net increase in unrealized gains on these investments of $39 million, $18 million and $67 million for the three months ended March 31, 2011 and 2010 and for the year ended December 31, 2010, respectively.
Dominion sponsors employee pension and other postretirement benefit plans, in which Dominion’s and Virginia Power’s employees participate, that hold investments in trusts to fund benefit payments. If the values of investments held in these trusts decline, it 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 contributions to be made to the employee benefit plans.
ITEM 4. CONTROLS AND PROCEDURES
Senior management of each of Dominion and Virginia Power, including Dominion’s and Virginia Power’s CEO and CFO, evaluated the effectiveness of each of their respective Companies’ disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation process, each of Dominion’s and Virginia Power’s CEO and CFO have concluded that each of their respective Companies’ disclosure controls and procedures are effective.
There were no changes in either Dominion’s or Virginia Power’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, either of the Companies’ internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, Dominion and Virginia Power are alleged to be in violation or in default under orders, statutes, rules or regulations relating to the environment, compliance plans imposed upon or agreed to by the Companies, or permits issued by various local, state and/or federal agencies for the construction or operation of facilities. Administrative proceedings may also be pending on these matters. In addition, in the ordinary course of business, the Companies and their subsidiaries are involved in various legal proceedings. Dominion and Virginia Power believe that the ultimate resolution of these proceedings will not have a material adverse effect on their financial position, liquidity or results of operations. See Notes 12 and 15 to the Consolidated Financial Statements and Notes 14 and 23 in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2010 for discussions on various environmental and other regulatory proceedings to which Dominion and/or Virginia Power are a party which disclosures are incorporated herein by reference.
ITEM 1A. RISK FACTORS
Dominion’s and Virginia Power’s businesses are influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond the Companies’ control. A number of these risk factors have been identified in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2010, which should be taken into consideration when reviewing the information contained in this report. Other than the risk factor discussed below, there have been no material changes with regard to the risk factors previously disclosed in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2010. For other factors that may cause actual results to
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differ materially from those indicated in any forward-looking statement or projection contained in this report, see Forward-Looking Statements in MD&A.
Dominion and Virginia Power have substantial ownership interests in and operate seven nuclear power plants; as a result, each may incur substantial costs and liabilities. Dominion and Virginia Power operate and have an ownership interest in seven nuclear units (four of which are owned and operated by Virginia Power, exclusive of a 11.6% undivided interest held by ODEC in the two North Anna units, and three of which are owned and operated by Dominion, exclusive of a 6.53% undivided interest in Unit 3 of Millstone held by Massachusetts Municipal Wholesale Electric Company and Central Vermont Public Service Corporation). In addition, Virginia Power is exploring the possibility of expanding its nuclear generating capacity to meet future expected baseload generation needs. Dominion’s and Virginia Power’s nuclear facilities are subject to operational, environmental, health and financial risks such as the on-site storage of spent nuclear fuel, the ability to dispose of such spent nuclear fuel, the ability to maintain adequate reserves for decommissioning, limitations on the amounts and types of insurance available, potential operational liabilities and extended outages, the costs of replacement power, the costs of maintenance and the costs of securing the facilities against possible terrorist attacks. Dominion and Virginia Power maintain decommissioning trusts and external insurance coverage to minimize the financial exposure to these risks; however, it is possible that damages could exceed the amount of the Companies’ insurance coverage. If Dominion and Virginia Power are not allowed to recover the additional costs incurred through insurance, or in the case of Virginia Power through regulatory mechanisms, their results of operations could be negatively impacted.
Dominion’s and Virginia Power’s nuclear facilities are also subject to complex government regulation which could negatively impact their results of operations. The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generating facilities. In the event of noncompliance, the NRC has the authority to impose fines, set license conditions, shut down a nuclear unit, or take some combination of these actions, depending on its assessment of the severity of the situation, until compliance is achieved. Revised safety requirements promulgated by the NRC could require Dominion and Virginia Power to make substantial expenditures at their nuclear plants. In addition, although the Companies have no reason to anticipate a serious nuclear incident at their plants, if an incident did occur, it could materially and adversely affect their results of operations and/or financial condition. A major incident at a nuclear facility anywhere in the world, such as the recent nuclear events in Japan, could cause the NRC to adopt increased safety regulations or otherwise limit or restrict the operation or licensing of domestic nuclear units.
Dominion and Virginia Power are subject to complex governmental regulation that could adversely affect their results of operations. Dominion’s and Virginia Power’s operations are subject to extensive federal, state and local regulation and require numerous permits, approvals and certificates from various governmental agencies. These operations are also subject to legislation governing taxation at the federal, state and local level. They must also comply with environmental legislation and associated regulations. Management believes that the necessary approvals have been obtained for existing operations and that their business is conducted in accordance with applicable laws. However, new laws or regulations, the revision or reinterpretation of existing laws or regulations, or penalties imposed for non-compliance with existing laws or regulations may result in substantial expense.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
Period
1/1/11-1/31/11
$1.78 billion
2/1/11-2/28/11
$1.76 billion
3/1/11-3/31/11
$1.50 billion
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ITEM 6. EXHIBITS
Exhibit
Description
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The following financial statements from Dominion Resources, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, filed on April 29, 2011, formatted in XBRL: (i) Consolidated Statements of Income, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Registrant
/s/ Ashwini Sawhney
Ashwini Sawhney
Vice President – Accounting and Controller
(Chief Accounting Officer)
Vice President – Accounting
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EXHIBIT INDEX
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