Item 1. Business

GENERAL

Dominion, headquartered in Richmond, Virginia and incorporated in Virginia in 1983, is one of the nation’s largest producers and transporters of energy. Dominion’s strategy is to be a leading provider of electricity, natural gas and related services to customers primarily in the eastern region of the U.S. Dominion’s portfolio of assets includes approximately 28,14223,600 MW of generating capacity, 6,3006,400 miles of electric transmission lines, 56,80057,000 miles of electric distribution lines, 11,00010,900 miles of natural gas transmission, gathering and storage pipeline and 21,80021,900 miles of gas distribution pipeline, exclusive of service lines of two inches in diameter or less.lines. Dominion also operates the nation’s largest underground natural gas storage system, with approximately 947 bcf of storage capacity, andpresently serves nearly 6 million utility and retail energy customers in 15 states.states and operates one of the nation’s largest underground natural gas storage systems, with approximately 947 bcf of storage capacity.

Dominion is focused on expanding its investment in regulated electric generation, transmission and distribution and regulated natural gas transmission and distribution infrastructure within and around its existing footprint. As a result, regulated capital projects will continue to receive priority treatment in its spending plans.With this investment, Dominion expects this will increase80% to 90% of future earnings from its earnings contributionprimary operating segments to come from regulated operations, while reducing the sensitivity of its earnings to commodity prices.and long-term contracted businesses.

Dominion continues to expand and improve its regulated electric and natural gas businesses, in accordance with its five-year capital investment program. A major impetus for this program is to meet the anticipated increase in electricity demand in its electric utility service territory as forecasted by PJM.territory. Other drivers for the capital investment program include the need to constructconstruction of infrastructure to handle the increase in natural gas production from the Marcellus and Utica Shale formations;formations and to upgrade itsDominion’s gas distribution and electric transmission and distribution network. networks. Investments to gather and process natural gas production from the Utica Shale formation, in eastern Ohio and western Pennsylvania, are being made by the Blue Racer joint venture.

In September 2013, Dominion announced the formation of Dominion Gas, a first tier wholly-owned subsidiary holding company for the majority of Dominion’s regulated natural gas businesses. Specifically, Dominion transferred direct ownership of East Ohio, DTI and Dominion Iroquois, the latter of which holds a 24.72% general partnership interest in Iroquois, to Dominion Gas on September 30, 2013. Dominion Gas will be the primary financing entity for Dominion’s regulated natural gas businesses and expects to become an SEC registrant in 2014.

Also in September 2013, Dominion announced its plans to form an MLP in 2014 by contributing certain of its midstream natural gas assets to the MLP initially and over time. Dominion is currently considering the contribution to the MLP of natural gas business assets other than those owned by Dominion Gas, including interests in Cove Point and Dominion’s share of the Blue Racer joint venture.

Dominion has announced that it may make further substantialtransitioned to a more regulated earnings mix as evidenced by its capital investments in otherregulated infrastructure, as well as dispositions of certain merchant generation facilities during 2012 and 2013 and the ongoing exit of natural gas projects over the next five years.

trading and certain energy marketing activities. Dominion’s nonregulated

ACQUISITIONSAND DISPOSITIONS

Following are significant acquisitions and divestitures by Dominion and Virginia Power during the last five years. There were no significant acquisitions by either registrant during this period.

SALEOF BRAYTON POINT, KINCAIDAND EQUITY METHOD INVESTMENTIN ELWOOD

In August 2013, Dominion completed the sale of Brayton Point, Kincaid and its equity method investment in Elwood to Energy Capital Partners and received proceeds of approximately $465 million, net of transaction costs. The historical results of Brayton Point’s and Kincaid’s operations are included in the Corporate and Other segment and presented in discontinued operations. See Note 3 to the Consolidated Financial Statements for additional information.

SALEOFE&P PROPERTIES

In April 2010, Dominion completed the sale of substantially all of its Appalachian E&P operations, including its rights to associated Marcellus acreage, to a newly-formed subsidiary of CONSOL for approximately $3.5 billion. See Note 4 to the Consolidated Financial Statements for additional information.

In 2007, Dominion completed the sale of its non-Appalachian natural gas and oil E&P operations and assets for approximately $13.9 billion.

The historical results of the non-Appalachian E&P operations are included in the Corporate and Other segment. The historical results of the Appalachian E&P operations are included in the Dominion Energy segment.

seconds atBased on the end of 2006 to 40 seconds atannual JD Power Customer Satisfaction results, DVP improved customer satisfaction and moved up three positions in the end of 2011.South Large segment ranking. Customer service options continue to be enhanced and expanded through the use of technology. Customers now have the ability to use the Internet for routine billing and payment transactions, connecting and disconnecting service, reporting outages and obtaining outage updates. Additionally, customers can follow progress to restoreof electric service restoration efforts following major outages by accessing Dominion’s Facebook, Twitter or Twitter. As electric distribution moves forward,internet website. In the future, safety, electric service reliability and customer service will remain key focal areas.focus areas for electric distribution.

Revenue provided by Virginia Power’s electric transmission operations is based primarily on rates approved by FERC. The profitability of this business is dependent on its ability, through the rates it is permitted to charge, to recover costs and earn a reasonable return on its capital investments. Variability in earnings primarily results from changes in rates and the timing of property additions, retirements and depreciation.

Virginia Power is a member of PJM, an RTO, and its electric transmission facilities are integrated into PJM wholesale electricity markets. Consistent with the increased authority given to NERC by EPACT, Virginia Power’s electric transmission operations are committed to meeting NERC standards, modernizing its infrastructure and maintaining superior system reliability. Virginia Power’s electric transmission operations will continue to focus on safety, operational performance, NERC compliance and execution of PJM’s RTEP.

The DVP Operating Segment of Dominion includes all of Virginia Power’s regulated electric transmission and distribution operations as discussed above, as well as Dominion’s nonregulated retail energy marketing operations.

Dominion’s retail energy marketing operations competeare now reflected in nonregulated energy markets. The retail business requires limited capital investment and currently employs approximately 190 people. The retail customer base includes 2.2 million customers and is diversified across three product lines-natural gas, electricity and home warranty services.the Dominion has a heavy concentration of natural gas customers in markets where utilities have a long-standing commitmentGeneration segment. See Note 25 to customer choice. Dominion pursues customers in electricity markets where utilities have divested of generation assets and where customers are permitted and have opted to purchase from the market. Major growth drivers are net customer additions, new market penetration, product development and expanded sales channels and supply optimization.Consolidated Financial Statements for additional information.

COMPETITION

DVP Operating Segment—Dominion and Virginia Power

WithinThere is no competition for electric distribution service within Virginia Power’s service territory in Virginia and North Carolina and no such competition is currently permitted. Additionally, there istraditionally has been no competition for electric distribution service. Additionally, since itstransmission service in the PJM region and Virginia Power’s electric transmission facilities are integrated into PJM. However, competition from non-incumbent PJM electric transmission services are administered by PJMowners for development, construction and are notownership of certain transmission facilities in Virginia Power’s service territory is now permitted pursuant to FERC Order 1000, subject to state and local siting and permitting approvals. This could result in additional competition to build transmission lines in relationVirginia Power’s service area in the future and could allow Dominion to transmissionseek opportunities to build facilities in other service provided to customers within the PJM region. Virginia Power is seeing continued growth in new customers in its transmission and distribution operations.

DVP Operating Segment—Dominion

Dominion’s retail energy marketing operations compete against incumbent utilities and other energy marketers in nonregulated

lated electric utility and its related energy supply operations. Virginia Power’s utility generation operations primarily serve the supply requirements for the DVP segment’s utility customers.The Dominion Generation Operating Segment of Dominion includes Virginia Power’s generation facilities and its related energy supply operations as well as the generation operations of Dominion’s merchant fleet and energy marketing and price risk management activities for these assets and Dominion’s nonregulated retail energy marketing operations.

Dominion Generation’s five-year electric utility investment plan includes spending approximately $3.3 billion from 2014 through 2018 to develop, finance and construct new generation capacity to meet growing electricity demand within its utility service territory. Significant projects under construction include Warren County and Brunswick County, which are estimated to cost approximately $1.1 billion and $1.3 billion, excluding financing costs, respectively. SeeProperties for additional information on these and other utility projects.

In addition, Dominion’s merchant fleet has acquired and developed several renewable generation projects, which began commercial operations during the fourth quarter of 2013. The total cost of the projects is approximately $200 million, excluding financing costs, and includes a fuel cell generation facility in Connecticut and solar generation facilities in Indiana, Georgia, and Connecticut. The output of these facilities is sold under long-term power purchase agreements with terms ranging from 15 to 25 years.

Earnings for theDominion Generation operating segmentOperating Segment of Virginia Powerprimarily result from the sale of electricity generated by its utility fleet. Revenue is based primarily on rates established by state regulatory authorities and state law. Approximately 80% of revenue comes from serving Virginia jurisdictional customers. RatesBase rates for the Virginia jurisdiction are set using a modified cost-of-service rate model.model, and are generally designed to allow an opportunity to recover the cost of providing utility service and earn a reasonable return on investments used to provide that service. Earnings variability may arise when revenues are impacted by factors not reflected in current rates, such as the impact of weather on customers’ demand for services. Likewise, earnings may reflect variations in the timing or nature of expenses as compared to those contemplated in current rates, such as labor and benefit costs, capacity expenses, and the timing, duration and costs of scheduled and unscheduled outages. The cost of fuel and purchased power is generally collected through fuel cost-recovery mechanisms established by regulators and does not materially impact net income. The cost of new generation facilities is generally recovered through rate adjustment clauses in Virginia. Variability in earnings for Virginia Power’s generation operations results from rate adjustment clauses reflects changes in rates, the demand for services,authorized ROE and the carrying amount of these facilities, which is primarily weather dependent,are largely driven by the timing and labor and benefit costs,amount of capital investments, as well as the timing, duration and costs of scheduled and unscheduled outages.depreciation. SeeElectric Regulation in Virginia underRegulation and Note 1413 to the Consolidated Financial Statements for additional information, including a discussion of the 2011 Biennial Review Order.information.

The Dominion Generation Operating Segment of Dominion includes Virginia Power’s generation facilities and its related energy supply operations described above as well as the generation operations of Dominion’s merchant fleet and energy marketing and price risk management activities for these assets. The Generation operating segment of Dominion derives its earnings primarily from the sale of electricity generated by Virginia Power’s utility and Dominion’s merchant generation assets, as well as

Competitors include other generating assets bidding to operate within the RTOs. These RTOs have clearly identified market rules that ensure the competitive wholesale market is

Following these divestitures, the generation capacity of Dominion’s merchant fleet totals 9,157approximately 4,000 MW. The generation mix is diversified and includes nuclear, coal, gas, oil and renewables. Merchant generation facilities are located in Connecticut, Illinois, Indiana, Massachusetts,Georgia, Pennsylvania, Rhode Island and West Virginia, and Wisconsin with a majority of that capacity concentrated in New England. Dominion is the largest generator in ISO-NE and, mirroring the region’s load demand, has principally baseload units with the remainder split between intermediate and peaking.

In the first quarter of 2011, Dominion decided to pursue the sale of Kewaunee. Any sale of Kewaunee would be subject to the approval of Dominion’s Board of Directors, as well as applicable state and federal approvals.

During the second quarter of 2011, Dominion announced its intention to retire State Line by mid-2014 and to retire two of the four units at Salem Harbor by the end of 2011 and the remaining two Salem Harbor units on June 1, 2014. These decisions were prompted by the economic outlook for both facilities, in combination with the expectation that State Line would be impacted by potential environmental regulations that would likely require significant capital expenditures. During the third quarter of 2011, Dominion announced an accelerated schedule for State Line, with the facility to be retired in the first quarter of 2012, given a continued decline in power prices and the expected cost to comply with environmental regulations.

term investment horizon, since the units will not be decommissioned for decades, and a positive long-term outlook for trust fund investment returns. Virginia Power will continue to monitor these trusts to ensure they meet the NRC minimum financial assurance requirement, which may include, if needed, the use of parent company guarantees, surety bonding or other financial guarantees recognized by the NRC.

The total estimated cost to decommission Virginia Power’s four nuclear units is $2.2 billionreflected in 2011 dollarsthe table below and is primarily based upon site-specific studies completed in 2009. These cost studies are generally completed every four to five years. The current cost estimates assume decommissioning activities will begin shortly after cessation of operations, which will occur when the operating licenses expire. Virginia Power expects to decommission the Surry and North Anna units during the period 2032 to 2067.

The gas transmission pipeline and storage business serves gas distribution businesses and other customers in the Northeast, mid-Atlantic and Midwest. Included in Dominion’sDominion Energy’s gas transmission pipeline and storage business is its gas gathering and extraction activity, which sells extracted products at market rates. Dominion’sDominion Energy’s LNG operations involve the import and storage of LNG at Cove Point and the transportation of regasified LNG to the interstate pipeline grid and mid-Atlantic and Northeast markets. In connection with the recent increase in Eastern U.S. natural gas production, including from the Marcellus and Utica shale formations, Dominion has requestedreceived DOE approval to export LNG from Cove Point and is awaiting other federal and state regulatory authorityapprovals to operate Cove Point as a bi-directional facility, able to import LNG, and vaporize it as natural gas, and liquefy natural gas and export it as LNG. SeeFuture Issues and Other Matters in MD&A for more information.

The Blue Racer joint venture concentrates on building new gathering, processing, fractionation and NGL transportation assets as the development of the Utica Shale formation increases. Dominion has contributed or sold various assets to the joint venture. See Note 9 to the Consolidated Financial Statements for more information.

In September 2013, Dominion announced the formation of Dominion Gas, a first tier wholly-owned subsidiary holding company for the majority of Dominion’s regulated natural gas businesses. Also in September 2013, Dominion announced its plans to form an MLP in 2014 by contributing certain of its midstream natural gas assets to the MLP initially and over time. SeeGeneral above for more information.

Dominion Energy’s five-year investment plan includes spending approximately $3.4 billion to $3.8 billion, exclusive of financing costs, from 2014 through 2018 for its Cove Point export project. Its five-year investment plan also includes spending approximately $2.1 billion to upgrade existing infrastructure or add new pipelines to meet growing energy needs within its service territory and maintain reliability.

Revenue provided by Dominion’sDominion Energy’s regulated gas transmission and storage and LNG operations is based primarily on rates established by FERC. Additionally, Dominion Energy receives revenue from firm fee-based contractual arrangements, including negotiated rates, for certain gas transportation, gas storage, LNG storage and regasification services. Dominion’s gas distribution operations serve residential, commercial and industrial gas sales, transportation and transportationgathering service customers. Revenue provided by its gas distribution operations is based primarily on rates established by the Ohio and West Virginia Commissions. The profitability of these businesses is dependent on Dominion’s ability, through the rates it is permitted to charge, to recover costs and earn a reasonable return on its capital investments. Variability in earnings results from operating and maintenance expenditures, as well as changes in rates and the demand for services, which are dependent on weather, changes in commodity prices and the economy.

Revenue from extraction and fractionation operations largely results from the sale of commodities at market prices. For DTI’s extraction and processing plants, Dominion purchases the wet gas product from producers and retains some or all of the extracted NGLs as compensation for its services. This exposes Dominion Energy to commodity price risk for the value of the spread between the NGL products and natural gas. In October 2008, addition, Dominion Energy has volumetric risk since gas deliveries to DTI’s facilities are not under long-term contracts. However, the extraction

of-way grants for many natural gas pipelines have been obtained from the actual ownerowners of real estate, as underlying titles have been examined. Where rights-of-way have not been obtained, they could be acquired from private owners by condemnation, if necessary. Many natural gas pipelines are on publicly-owned property, where company rights and actions are determined on a case-by-case basis, with results that range from reimbursed relocation to revocation of permission to operate.

In September 2012, DTI completed by the fourth quarter of 2012. The cost of the project will be paid for by rates charged to producers.

In June 2011, FERC approved DTI’s $634$575 million Appalachian Gateway Project. The project is expected to provideprovides approximately 484,000 dekatherms per day of firm transportation services for new Appalachian gas supplies in West Virginia and southwestern Pennsylvania to an interconnection with Texas Eastern Transmission, LP at Oakford, Pennsylvania. Construction has commenced and transportation services are scheduled to begin by September 2012.

In August 2011,November 2012, DTI received FERC authorization forcompleted the $97 million Northeast Expansion Project. The project is expected to provideprovides approximately 200,000 dekatherms per day of firm transportation services for CONSOL’s Marcellus Shale natural gas production from various receipt points in central and southwestern Pennsylvania to a nexus of market pipelines and storage facilities in Leidy, Pennsylvania. The project is expected to cost approximately $100 million. Construction of new compression facilities

strategic investments to advance Dominion’s degree of understanding of such technologies.

Environmental Compliance

Dominion and Virginia Power remain committed to compliance with all applicable environmental laws, regulations and rules related to their operations. Additional information related to Dominion’s and Virginia Power’s environmental compliance matters can be found inFuture Issues and Other Mattersin Item 7. MD&A and in Note 2322 to the Consolidated Financial Statements.

Conservation and Load Management

Conservation playsand load management play a significant role in meeting the growing demand for electricity. The Regulation Act provides incentives for energy conservation and sets a voluntary goal for Virginia to reduce electricity consumption by retail customers in 2022 by ten percent10% of the amountelectric energy consumed in 2006 through the implementation of conservation programs. LegislationAdditional legislation in 2009 added definitions of peak-shaving and energy efficiency programs, and allowed for a margin on operating expenses and recovery of revenue reductions related to energy efficiency programs.

Virginia Power’s DSM programs provide important incremental steps toward achieving the voluntary ten percent10% energy conservation goal.goal through activities such as energy audits and incentives for customers to upgrade or install certain energy efficient systems. The conservationDSM programs began in Virginia in 2010 and load management plan includesin North Carolina in 2011.

Virginia Power currently offers the following DSM programs which were approved by the Virginia Commission in March 2010 and were rolled out in May 2010:Virginia:

Virginia Power is considering the development of a commercial offshore wind generation project through a federal land lease off the Virginia coast.

Dominion has invested in wind energy through two joint ventures. Dominion is a 50% owner with Shell of NedPower. Dominion’s share of this project produces 132 MW of renewable energy. Dominion is also a 50% owner with BP of the first phase of Fowler Ridge, which has a generating capacity of 300 MW. Dominion has a long-term agreement with Fowler Ridge to purchase 200 MW of energy, capacity and environmental attributes from this first phase. In the first quarter of 2011, Dominion completed the sale of its remaining share of the development assets of the second phase of Fowler Ridge to BP.

In October 2011, addition, during 2013 Dominion acquired and developed 42 MW of renewable energy projects, which includes solar generation facilities in Indiana, Georgia, and Connecticut.

Virginia Power filedis implementing the Solar Partnership Program. The Virginia Commission requires the project be constructed and operated at a cost to customers not to exceed $80 million. In 2013, Virginia Power announced that Old Dominion University and Canon Virginia’s Industrial Resource Technologies had been selected as participants in the program. During 2014, Virginia Power is planning to develop six to ten additional sites with a total capacity of up to 10 MW.

In March 2013, the Virginia Commission an application to conduct a solar distributed generation demonstration program, consistingapproved Rate Schedule SP, under which Virginia Power will purchase 100% of up to a combined 30 MW of company-owned solar distributed generation facilities to be located at selected commercial, industrial and community locations throughout its Virginia service territory, as well asthe energy output from up to a combined 3 MW of customer-owned solar distributed generation facilities, that will be subject toincluding all environmental attributes and associated renewable energy credits, at a tariff filed with thefixed price of $0.15 per kWh for five years. This fixed price has two components: an avoided cost component (including line losses) determined using Virginia Commission in 2012. If approved, this program is expected to generate enough electricity to power about 6,000 homes during peak daylight hours.

Other Generation Development

Power’s Rate Schedule 19 and recovered through Virginia Power has announced a comprehensive generation growth program, referred to asPowering Virginia, which involves the development, financing, construction and operation of new multi-fuel, multi-technology generation capacity to meet the anticipated growth in demand in its core market of Virginia. Virginia Power expects that these investments collectively will provide the following benefits: expanded electricity production capability, increased technological andPower’s fuel diversityfactor, and a reductionvoluntary environmental contribution component.

In December 2013, Dominion placed into service a fuel cell facility in Connecticut that produces approximately 15 MW of electricity using a reactive process that converts natural gas into electricity.

SeeFuture Issues and Other Mattersin Item 7. MD&A and Note 22 to the CO₂ emission intensity of its generation fleet.Consolidated Financial Statements for additional information.

While Virginia Power’s new Virginia City Hybrid Energy Center, which is currently under construction in southwest Virginia, will be a new source of GHG emissions upon entering service, Virginia Power has taken steps to minimize the impact on the environment. The new plant is expected to use at least 10% biomass for fuel and is designed to be carbon-capture compatible, meaning that technology to capture CO₂ can be added to the station if or when it becomes commercially available. Also, Virginia Power has announced plans to convert its coal units at Bremo to natural gas, contingent upon the Virginia City Hybrid Energy Center entering service and receipt of necessary approvals. It is currently estimated that the Virginia City Hybrid Energy Center will have the potential to emit about 4.8 million metric tonnes of direct CO₂ emissions in a year assuming a 100% capacity factor and 100% coal-fired operation. Actual emissions will depend on the capacity factor of the facility and the extent to which biomass is burned.

Dominion also developed a comprehensive GHG inventory for calendar year 2010.2012. For Dominion Generation, Dominion���sDominion’s and Virginia Power’s direct CO₂ equivalent emissions, based on equity share (ownership), were approximately 52.436.2 million metric tonnes and 32.424.4 million metric tonnes, respectively.respectively, in 2012, compared to 42.1 million metric tonnes and 25.9 million metric tonnes, respectively, in 2011. The decrease in emissions from 2011 to 2012 is largely due to an increase in natural gas usage, less reliance on coal, and more renewable generation. For the DVP operating segment’s electric transmission and distribution operations, direct CO₂ equivalent emissions for 2012 were approximately 0.2 million76,143 metric tonnes.tonnes, representing a decrease of almost 50% from 2011 due to a decrease in gas leakage from insulating equipment. For 2012, DTI’s (including Cove Point) direct CO₂ equivalent emissions were approximately 3.01.0 million metric tonnes, and Hope’s and East Ohio’s direct CO₂ equivalent emissions were approximately 1.40.9 million metric tonnes. Whiletonnes, showing a 58% decrease from 2011. Dominion’s GHG inventory follows all methodologies specified in the Companies do not have final 2011 emissions data, they do not expect a significant variance in emissions from 2010 amounts. With respect to electric generation, primary facility stack emissions of CO₂ from carbon based fuel combustion are directly measured via continuous emissions monitor system methods set forth underEPA Mandatory Greenhouse Gas Reporting Rule, 40 CFR Part 75 of the U.S. Electric Code of Federal Regulation. For those emission sources not covered under 40 CFR Part 75, and

The Regulation Act authorizes stand-alone rate adjustment clauses for recovery of costs for new generation facilities or major unit modifications of existing facilities,projects, FERC-approved transmission costs, environmental compliance, conservation and energy efficiency programs and renewable energy programs. Itprograms; and it provides for enhanced returns on capital expenditures relatingon specific new generation projects. The Regulation Act also continues statutory provisions directing Virginia Power to file annual fuel cost recovery cases with the construction or major modification of facilities that are nuclear-powered, clean coal/carbon capture compatible-powered, or renewable-powered, as well as conventional coal and combined-cycle combustion turbine facilities. Costs of fuel used forVirginia Commission.

Legislation enacted in February 2013 amended the generation of electricity, along with costs of purchased power, are recovered from customers through an annually approved fuel rider, as provided under a separate sectionRegulation Act prospectively, including elimination of the Virginia Code. Decisions of50 basis points RPS ROE incentive. In addition, ROE incentives for newly proposed generation projects were eliminated, except for nuclear and offshore wind projects, which were reduced from the previous 200 basis points ROE incentive to 100 basis points. In addition, through the 2013 amendments, the Virginia Commission may be appealedhas the discretion to increase or decrease a utility’s authorized ROE based on the utility’s performance consistent with Virginia Commission precedent that existed prior to 2007. The legislation included changes to the Supreme Courtearnings test parameters defined by the Regulation Act to allow for a wider band of Virginia.70 basis points above and below the authorized ROE in determining whether a utility’s earned ROE is either insufficient or excessive beginning with the biennial review for 2013-2014 to be filed in 2015. Additionally, if a utility is deemed to have over-earned, the customer refund share of excess earnings increases to 70% from the previous 60% level beginning with the biennial review for 2013-2014 to be filed in 2015.

If the Virginia Commission’s future rate decisions, including actions relating to Virginia Power’s rate adjustment clause filings,

of operating costs are recovered through a monthly charge rather than a volumetric charge, is utilized to establish rates for a majority of East Ohio’s customers pursuant to a 2008 rate case settlement. Base rates for Hope are designed primarily based on a rate design methodology in which the majority of operating costs are recovered through volumetric charges.

In addition to general rate increases, Dominion’s gas distribution subsidiaries make routine separate filings with their respective state regulatory commissions to reflect changes in the costs of purchased gas. The majority of these purchased gas costs are subject to rate recovery through a mechanism that ensures dollar for dollar recovery of prudently incurred costs. Costs that are expected to be recovered in future rates are deferred as regulatory assets. The purchased gas cost recovery filings generally cover prospective one-, three- or twelve-month periods. Approved increases or decreases in gas cost recovery rates result in increases or decreases in revenues with corresponding increases or decreases in net purchased gas cost expenses.

The Ohio Commission has also approved several stand-alone cost recovery mechanisms to recover specified costs and a return for infrastructure projects and certain other costs that vary widely over time; such costs are excluded from general base rates. See Note 1413 to the Consolidated Financial Statements for additional information.

Federal Regulations

FEDERAL ENERGY REGULATORY COMMISSION

Electric

Under the Federal Power Act, FERC regulates wholesale sales and transmission of electricity in interstate commerce by public utilities. Virginia Power purchases and sells electricity in the PJM wholesale market and Dominion’s merchant generators sell electricity in the PJM, MISO and ISO-NE wholesale markets under Dominion’s market-based sales tariffs authorized by FERC. In addition, Virginia Power has FERC approval of a tariff to sell wholesale power at capped rates based on its embedded cost of

located in areas of high-density population. Dominion has evaluated its natural gas transmission and storage properties, as required by the Department of Transportation regulations under these Acts, and has implemented a program of identification, testing and potential remediation activities. These activities are ongoing.

SeeFuture Issues and Other Matters in MD&A and Note 1413 to the Consolidated Financial Statements for additional information.

Environmental Regulations

Each of Dominion’s and Virginia Power’s operating segments faces substantial laws, regulations and compliance costs with respect to environmental matters. In addition to imposing continuing compliance obligations, these laws and regulations authorize the imposition of substantial penalties for noncompliance, including fines, injunctive relief and other sanctions. The cost of complying with applicable environmental laws, regulations and rules is expected to be material to the Companies. If expenditures for pollution control technologies and associated operating costs are not recoverable from customers through regulated rates (in regulated jurisdictions)businesses) or market prices (in deregulated jurisdictions)unregulated businesses), those costs could adversely affect future results of operations and cash flows. Dominion and Virginia Power have applied for or obtained the necessary environmental permits for the operation of their facilities. Many of these permits are subject to reissuance and continuing review. For a discussion of significant aspects of these matters, including current and planned capital expenditures relating to environmental compliance required to be discussed in this Item, seeEnvironmental MattersinFuture Issues and Other Matters in Item 7. MD&A, which information is incorporated herein by reference. Additional information can also be found in Item 3. Legal Proceedings and Note 2322 to the Consolidated Financial Statements.

GLOBAL CLIMATE CHANGE

The national and international attention in recent years on GHG emissions and their relationship to climate change has resulted in federal, regional and state legislative orand regulatory action in this

tribution and generation operations are subject to regulatory review.Revenue provided by Virginia Power’s electric transmission, distribution and generation operations and Dominion’s gas transmission and distribution operations is based primarily on rates approved by state and federal regulatory agencies. The profitability of these businesses is dependent on their ability, through the rates that they are permitted to charge, to recover costs and earn a reasonable rate of return on their capital investment.

Virginia Power’s wholesale rates for electric transmission service are adjusted on an annual basis through operation of a FERC-approved formula rate mechanism. Through this mechanism, Virginia Power’s wholesale electric transmission cost of service is estimated and thereafter adjusted to reflect Virginia Power’s actual electric transmission costs incurred. These wholesale rates are subject to FERC review and prospective adjustment in the event that customers and/or interested state commissions file a complaint with FERC and are able to demonstrate that Virginia Power’s wholesale revenue requirement is no longer just and reasonable.

Similarly, various rates and charges assessed by Dominion’s gas transmission businesses are subject to review by FERC. In addition, the rates of Dominion’s gas distribution businesses are subject to state regulatory review in the jurisdictions in which they operate.

Virginia Power’s base rates, terms and conditions for generation and distribution services to customers in Virginia are reviewed by the Virginia Commission on a biennial basis in a proceeding that involves the determination of Virginia Power’s actual earned ROE during a combined two-year historic test period, and the determination of Virginia Power’s authorized ROE prospectively. Under certain circumstances described in the Regulation Act, Virginia Power may be required to share a portion of its earnings with customers through a refund process, and the Virginia Commission may order a base rate increase or reduction during the biennial review. As a result, Virginia Power may potentially not fully recover costs associated with these existing rate adjustment clauses.

Virginia Power’s retail electric base rates for bundled generation, transmission, and distribution services to customers in North Carolina are regulated on a cost-of-service/rate-of-return basis subject to North Carolina statutes, and the rules and procedures of the North Carolina Commission. If retail electric earnings exceed the returns established by the North Carolina Commission, retail electric rates may be subject to review and possible reduction by the North Carolina Commission, which may decrease Virginia Power’s future earnings. Additionally, if the North Carolina Commission does not allow recovery through base rates, on a timely basis, of costs incurred in providing service, Virginia Power’s future earnings could be negatively impacted.

Dominion and Virginia Power are subject to complex governmental regulation, including tax regulation, that could adversely affect their results of operations.operations and subject the Companies to monetary penalties.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 legislationlegis-

and effectively integrate the Companies to higher operating costsprojects into their operations and such integration may result in increased capital expenditures. If either Dominionunforeseen operating difficulties or Virginia Power is foundunanticipated costs. Further, regulators may disallow recovery of some of the costs of a project if they are deemed not to be in compliance withprudently incurred. Any of these or other factors could adversely affect the mandatory reliability standards it could be subjectCompanies’ ability to remediation costs, as well as sanctions, including substantial monetary penalties.realize the anticipated benefits from the plant construction, conversion and expansion projects.

Dominion’s and Virginia Power’s current costs of compliance with environmental laws are significant. The costs of compliance with future environmental laws, including laws and regulations designed to address global climate change, air quality, coal combustion by-products, cooling water and other matters could make certain of the Companies’ generation facilities uneconomical to maintain or operate.Dominion’s and Virginia Power’s operations are subject to extensive federal, state and local environmental statutes, rules and regulations relating to air quality, water quality, waste management, natural resources, and health and safety. Compliance with these legal requirements requires the Companies to commit significant capital toward permitting, emission fees, environmental monitoring, installation and operation of pollution control equipment and purchase of allowances and/or offsets. Additionally, the Companies could be responsible for expenses relating to remediation and containment obligations, including at sites where they have been identified by a regulatory agency as a potentially responsible party. Expenditures relating to environmental compliance have been significant in the past, and Dominion and Virginia Power expect that they will remain significant in the future. Certain facilities have become uneconomical to operate and have been shut down, converted to new fuel types or sold. These types of events could occur again in the future.

Existing environmental laws and regulations may be revised and/or new laws may be adopted or become applicable to Dominion or Virginia Power. The EPA is expected to issue additional regulations with respect to air quality under the CAA, including revised NAAQS and regulations governing the emissions of GHGs from electric generating units. Additional regulation of air quality and GHG emissions under the CAA may be imposed on the natural gas sector, including rules to limit methane leakage. Compliance with GHG emission reduction requirements may require the retrofit or replacement of equipment or could otherwise increase the cost to operate and maintain our facilities. Risks relating to potential regulation of GHG emissions are discussed below. Dominion and

them from accomplishing critical business functions. In addition, weather-related incidents, earthquakes and other natural disasters can disrupt generation, transmission and distributionoperation of the Companies’ facilities. Because Virginia Power’s transmission facilities are interconnected with those of third parties, the operation of its facilities could be adversely affected by unexpected or uncontrollable events occurring on the systems of such third parties.

Operation of the Companies’ generation facilities below expected capacity levels could result in lost revenues and increased expenses, including higher maintenance costs. Unplanned outages of generating unitsthe Companies’ facilities and extensions of scheduled outages due to mechanical failures or other problems occur from time to time and are an inherent risk of the Companies’ business. Unplanned outages typically increase the Companies’ operation and maintenance expenses and may reduce their revenues as a result of selling less energyoutput or may require the Companies to incur significant costs as a result of operating higher cost units or obtaining replacement energy and capacityoutput from third parties in the open market to satisfy forward energy and capacity or other contractual obligations. Moreover, if the Companies are unable to perform their contractual obligations, penalties or liability for damages could result.

In addition, there are many risks associated with the Companies’ operations, including nuclear accidents, fires, explosions, uncontrolled release of natural gas and other environmental hazards, pole strikes, electric contact cases and avian impacts. Such incidents could result in loss of human life or injuries among employees, customers or the public in general, environmental pollution, damage or destruction of facilities or business interruptions and associated public or employee safety impacts, loss of revenues, increased liabilities, heightened regulatory scrutiny and reputational risk.

Dominion and Virginia Power have substantial ownership interests in and operate nuclear generating units; as a result, each may incursubstantial costs and liabilities.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 future decommissioning costs could exceed amounts in the decommissioning trusts and/or damages could exceed the amount of insurance coverage. If Dominion’s and Virginia Power’s decommissioning trust funds are insufficient, and they 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

There are significant customer risks associated with the project. The terminal service agreements are subject to certain conditions precedent, including receipt of regulatory approvals. Dominion will also be exposed to counterparty credit risk. While the counterparties’ obligations are supported by parental guarantees and letters of credit, there is no assurance that such credit support would be sufficient to satisfy the obligations in the event of a counterparty default. In addition, if a controversy arises under either agreement resulting in a judgment in Dominion’s favor, Dominion may need to seek to enforce a final U.S. court judgment in a foreign tribunal, which could involve a lengthy process.

Assuming current commodity price trends continue, if Dominion is unable to pursue the liquefaction project, Dominion may not be able to offset the prospective revenue reductions associated with the existing import contracts as described inFutureIssues and Other Matters, which could have a negative impact on its results of operations.

Dominion’s merchant power business is operating in a challenging market, which could adversely affect its results of operationsoperations and future growth. The success of Dominion’s merchant power business depends upon favorable market conditions including the ability to

including as a result of volatility in the market values of the underlying commodities, if a counterparty fails to perform under a contract or upon the failure or insolvency of a financial intermediary, exchange or clearinghouse used to enter, execute or clear these transactions. In the absence of actively-quoted market prices and pricing information from external sources, the valuation of these contracts involves management’s judgment or use of estimates. As a result, changes in the under-