| Fair Value Measurements |
Fair Value Measurements The Companies' fair value measurements are made in accordance with the policies discussed in Note 6 to the Consolidated Financial Statements in the Companies' Annual Report on Form 10-K for the year ended December 31, 2014. See Note 9 in this report for further information about the Companies' derivatives and hedge accounting activities.
The Companies enter into certain physical and financial forwards, futures, options and swaps, which are considered Level 3 as they have one or more inputs that are not observable and are significant to the valuation. The discounted cash flow method is used to value Level 3 physical and financial forwards and futures contracts. An option model is used to value Level 3 physical and financial options. The discounted cash flow model for forwards and futures calculates mark-to-market valuations based on forward market prices, original transaction prices, volumes, risk-free rate of return, and credit spreads. The option model calculates mark-to-market valuations using variations of the Black-Scholes option model. The inputs into the models are the forward market prices, implied price volatilities, risk-free rate of return, the option expiration dates, the option strike prices, the original sales prices, and volumes. For Level 3 fair value measurements, forward market prices, credit spreads and implied price volatilities are considered unobservable. The unobservable inputs are developed and substantiated using historical information, available market data, third-party data, and statistical analysis. Periodically, inputs to valuation models are reviewed and revised as needed, based on historical information, updated market data, market liquidity and relationships, and changes in third-party pricing sources.
The following table presents Dominion's quantitative information about Level 3 fair value measurements at September 30, 2015. The range and weighted average are presented in dollars for market price inputs and percentages for credit spreads and price volatility. | | | | | | | | | | | | Fair Value (millions) | Valuation Techniques | Unobservable Input | | Range | Weighted Average(1) | Assets: | | | | | | | Physical and Financial Forwards and Futures: | | | | | | | Natural Gas(2) | $ | 99 |
| Discounted Cash Flow | Market Price (per Dth) | (4) | (2) - 4 | (1 | ) | | | | Credit spread | (5) | 1% - 6% | 3 | % | Liquids(3) | 5 |
| Discounted Cash Flow | Market Price (per Gal) | (4) | 0 - 2 | 1 |
| Electric | 4 |
| Discounted Cash Flow | Market Price (per MWh) | (4) | 26 - 47 | 45 |
| FTRs | 23 |
| Discounted Cash Flow | Market Price (per MWh) | (4) | (3) - 12 | 2 |
| Physical and Financial Options: | | | | | | | Natural Gas | 6 |
| Option Model | Market Price (per Dth) | (4) | 2 - 6 | 4 |
| | | | Price Volatility | (6) | 23% - 75% | 44 | % | Total assets | $ | 137 |
| | | | | | Liabilities: | | | | | | | Physical and Financial Forwards and Futures: | | | | | | | Natural Gas(2) | $ | 10 |
| Discounted Cash Flow | Market Price (per Dth) | (4) | (2) - 4 | 1 |
| FTRs | 2 |
| Discounted Cash Flow | Market Price (per MWh) | (4) | (12) - 12 | 1 |
| Physical and Financial Options: | | | | | | | Natural Gas | 2 |
| Option Model | Market Price (per Dth) | (4) | 2 - 4 | 3 |
| | | | Price Volatility | (6) | 23% - 50% | 34 | % | Total liabilities | $ | 14 |
| | | | | |
| | (1) | Averages weighted by volume. |
| | (3) | Includes NGLs and oil. |
| | (4) | Represents market prices beyond defined terms for Levels 1 and 2. |
| | (5) | Represents credit spreads unrepresented in published markets. |
| | (6) | Represents volatilities unrepresented in published markets. |
Sensitivity of the fair value measurements to changes in the significant unobservable inputs is as follows: | | | | | Significant Unobservable Inputs | Position | Change to Input | Impact on Fair Value Measurement | Market Price | Buy | Increase (decrease) | Gain (loss) | Market Price | Sell | Increase (decrease) | Loss (gain) | Price Volatility | Buy | Increase (decrease) | Gain (loss) | Price Volatility | Sell | Increase (decrease) | Loss (gain) | Credit spread | Asset | Increase (decrease) | Loss (gain) |
Recurring Fair Value Measurements
Dominion The following table presents Dominion’s assets and liabilities that are measured at fair value on a recurring basis for each hierarchy level, including both current and noncurrent portions: | | | | | | | | | | | | | | | Level 1 | Level 2 | Level 3 | Total | (millions) | | | | | At September 30, 2015 | | | | | Assets: | | | | | Derivatives: | | | | | Commodity | $ | 1 |
| $ | 237 |
| $ | 137 |
| $ | 375 |
| Interest rate | — |
| 31 |
| — |
| 31 |
| Investments(1): | | | | | Equity securities: | | | | | U.S.: | | | | | Large cap | 2,401 |
| — |
| — |
| 2,401 |
| Other | 5 |
| — |
| — |
| 5 |
| REIT | 59 |
| — |
| — |
| 59 |
| Non-U.S.: | | | | | Large cap | 10 |
| — |
| — |
| 10 |
| Fixed income: | | | | | Corporate debt instruments | — |
| 463 |
| — |
| 463 |
| U.S. Treasury securities and agency debentures | 431 |
| 184 |
| — |
| 615 |
| State and municipal | — |
| 395 |
| — |
| 395 |
| Other | — |
| 97 |
| — |
| 97 |
| Cash equivalents and other | 6 |
| 1 |
| — |
| 7 |
| Total assets | $ | 2,913 |
| $ | 1,408 |
| $ | 137 |
| $ | 4,458 |
| Liabilities: | | | | | Derivatives: | | | | | Commodity | $ | 1 |
| $ | 117 |
| $ | 14 |
| $ | 132 |
| Interest rate | — |
| 214 |
| — |
| 214 |
| Total liabilities | $ | 1 |
| $ | 331 |
| $ | 14 |
| $ | 346 |
| At December 31, 2014 | | | | | Assets: | | | | | Derivatives: | | | | | Commodity | $ | 3 |
| $ | 567 |
| $ | 125 |
| $ | 695 |
| Interest rate | — |
| 24 |
| — |
| 24 |
| Investments(1): | | | | | Equity securities: | | | | | U.S.: | | | | | Large cap | 2,669 |
| — |
| — |
| 2,669 |
| Other | 6 |
| — |
| — |
| 6 |
| Non-U.S.: | | | | | Large cap | 12 |
| — |
| — |
| 12 |
| Fixed income: | | | | | Corporate debt instruments | — |
| 441 |
| — |
| 441 |
| U.S. Treasury securities and agency debentures | 419 |
| 190 |
| — |
| 609 |
| State and municipal | — |
| 395 |
| — |
| 395 |
|
| | | | | | | | | | | | | | Other | — |
| 74 |
| — |
| 74 |
| Cash equivalents and other | 3 |
| 10 |
| — |
| 13 |
| Total assets | $ | 3,112 |
| $ | 1,701 |
| $ | 125 |
| $ | 4,938 |
| Liabilities: | | | | | Derivatives: | | | | | Commodity | $ | 3 |
| $ | 571 |
| $ | 18 |
| $ | 592 |
| Interest rate | — |
| 202 |
| — |
| 202 |
| Total liabilities | $ | 3 |
| $ | 773 |
| $ | 18 |
| $ | 794 |
|
| | (1) | Includes investments held in the nuclear decommissioning and rabbi trusts. |
The following table presents the net change in Dominion's assets and liabilities measured at fair value on a recurring basis and included in the Level 3 fair value category: | | | | | | | | | | | | | | | Three Months Ended September 30, | Nine Months Ended September 30, | | 2015 | 2014 | 2015 | 2014 | (millions) | | | | | Beginning balance | $ | 71 |
| $ | 3 |
| $ | 107 |
| $ | (16 | ) | Total realized and unrealized gains (losses): | | | | | Included in earnings | (9 | ) | (2 | ) | 1 |
| 98 |
| Included in other comprehensive income (loss) | 5 |
| 4 |
| (7 | ) | 7 |
| Included in regulatory assets/liabilities | 47 |
| 39 |
| 18 |
| 53 |
| Settlements | 10 |
| 5 |
| 1 |
| (94 | ) | Transfers out of Level 3(1) | (1 | ) | (2 | ) | 3 |
| (1 | ) | Ending balance | $ | 123 |
| $ | 47 |
| $ | 123 |
| $ | 47 |
| 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 | $ | 1 |
| $ | 1 |
| $ | 1 |
| $ | 2 |
|
| | (1) | In March 2015, Dominion changed the classification of certain short term NGL derivatives from Level 3 to Level 2 due to an increase in liquidity in financial forward markets. The transfers out of Level 3 that relate to NGLs for the three and nine months ended September 30, 2015 are $--- million and $9 million, respectively. |
The following table presents Dominion's classification of gains and losses included in earnings in the Level 3 fair value category: | | | | | | | | | | | | | | | Operating
revenue | Purchased Gas | Electric fuel
and other
energy-related
purchases | Total | (millions) | | | | | Three Months Ended September 30, 2015 | | | | | Total gains (losses) included in earnings | $ | — |
| $ | — |
| $ | (9 | ) | $ | (9 | ) | 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 | — |
| — |
| 1 |
| 1 |
| Three Months Ended September 30, 2014 | | | | | Total gains (losses) included in earnings | $ | 3 |
| $ | (3 | ) | $ | (2 | ) | $ | (2 | ) | The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets/liabilities still held at the reporting date | 3 |
| (2 | ) | — |
| 1 |
| Nine Months Ended September 30, 2015 | | | | | Total gains (losses) included in earnings | $ | 2 |
| $ | — |
| $ | (1 | ) | $ | 1 |
| 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 | 1 |
| — |
| — |
| 1 |
| Nine Months Ended September 30, 2014 | | | | | Total gains (losses) included in earnings | $ | (7 | ) | $ | (4 | ) | $ | 109 |
| $ | 98 |
| The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets/liabilities still held at the reporting date | 4 |
| (2 | ) | — |
| 2 |
|
Virginia Power The following table presents Virginia Power's quantitative information about Level 3 fair value measurements at September 30, 2015. The range and weighted average are presented in dollars for market price inputs and percentages for credit spreads and price volatility.
| | | | | | | | | | | | Fair Value (millions) | Valuation Techniques | Unobservable Input | | Range | Weighted Average(1) | Assets: | | | | | | | Physical and Financial Forwards and Futures: | | | | | | | FTRs | $ | 23 |
| Discounted Cash Flow | Market Price (per MWh) | (3) | (3) - 12 | 2 |
| Natural Gas(2) | 93 |
| Discounted Cash Flow | Market Price (per Dth) | (3) | (2) - 3 | (1 | ) | | | | Credit spread | (4) | 1% - 6% | 3 | % | Electric | 4 |
| Discounted Cash Flow | Market Price (per MWh) | (3) | 44 - 47 | 45 |
| Physical and Financial Options: | | | | | | | Natural Gas | 2 |
| Discounted Cash Flow | Market Price (per Dth) | (3) | 2 - 6 | 5 |
| | | | Price Volatility | (5) | 50% - 75% | 66 | % | Total assets | $ | 122 |
| | | | | | Liabilities: | | | | | | | Physical and Financial Forwards and Futures: | | | | | | | FTRs | $ | 2 |
| Discounted Cash Flow | Market Price (per MWh) | (3) | (12) - 12 | 1 |
| Total liabilities | $ | 2 |
| | | | | |
| | (1) | Averages weighted by volume. |
| | (3) | Represents market prices beyond defined terms for Levels 1 and 2. |
| | (4) | Represents credit spreads unrepresented in published markets. |
| | (5) | Represents volatilities unrepresented in published markets. |
Sensitivity of the fair value measurements to changes in the significant unobservable inputs is as follows: | | | | | Significant Unobservable Inputs | Position | Change to Input | Impact on Fair Value Measurement | Market Price | Buy | Increase (decrease) | Gain (loss) | Market Price | Sell | Increase (decrease) | Loss (gain) | Credit spread | Asset | Increase (decrease) | Loss (gain) | Price Volatility | Buy | Increase (decrease) | Gain (loss) | Price Volatility | Sell | Increase (decrease) | Loss (gain) |
The following table presents Virginia Power’s assets and liabilities that are measured at fair value on a recurring basis for each hierarchy level, including both current and noncurrent portions: | | | | | | | | | | | | | | | Level 1 | Level 2 | Level 3 | Total | (millions) | | | | | At September 30, 2015 | | | | | Assets: | | | | | Derivatives: | | | | | Commodity | $ | — |
| $ | 20 |
| $ | 122 |
| $ | 142 |
| Interest rate | — |
| 8 |
| — |
| 8 |
| Investments(1): | | | | | Equity securities: | | | | | U.S. large cap | 1,037 |
| — |
| — |
| 1,037 |
| REIT | 59 |
| — |
|
| 59 |
| Fixed income: | | | | | Corporate debt instruments | — |
| 252 |
| — |
| 252 |
| U.S. Treasury securities and agency debentures | 164 |
| 61 |
| — |
| 225 |
| State and municipal | — |
| 199 |
| — |
| 199 |
| Other | — |
| 30 |
| — |
| 30 |
| Total assets | $ | 1,260 |
| $ | 570 |
| $ | 122 |
| $ | 1,952 |
| Liabilities: | | | | | Derivatives: | | | | | Commodity | $ | — |
| $ | 4 |
| $ | 2 |
| $ | 6 |
| Interest rate | — |
| 67 |
| — |
| 67 |
| Total liabilities | $ | — |
| $ | 71 |
| $ | 2 |
| $ | 73 |
| At December 31, 2014 | |
| |
| | | Assets: | |
| |
| | | Derivatives: | |
| |
| | | Commodity | $ | — |
| $ | 7 |
| $ | 106 |
| $ | 113 |
| Investments(1): | |
| |
| | | Equity securities: | |
| |
| | | U.S. large cap | 1,157 |
| — |
| — |
| 1,157 |
| Fixed income: | |
| |
| | | Corporate debt instruments | — |
| 250 |
| — |
| 250 |
| U.S. Treasury securities and agency debentures | 137 |
| 61 |
| — |
| 198 |
| State and municipal | — |
| 211 |
| — |
| 211 |
| Other | — |
| 23 |
| — |
| 23 |
| Total assets | $ | 1,294 |
| $ | 552 |
| $ | 106 |
| $ | 1,952 |
| Liabilities: | |
| |
| | | Derivatives: | |
| |
| | | Commodity | $ | — |
| $ | 11 |
| $ | 4 |
| $ | 15 |
| Interest rate | — |
| 72 |
| — |
| 72 |
| Total liabilities | $ | — |
| $ | 83 |
| $ | 4 |
| $ | 87 |
|
| | (1) | Includes investments held in the nuclear decommissioning and rabbi trusts. |
The following table presents the net change in Virginia Power’s assets and liabilities measured at fair value on a recurring basis and included in the Level 3 fair value category: | | | | | | | | | | | | | | | Three Months Ended September 30, | Nine Months Ended September 30, | | 2015 | 2014 | 2015 | 2014 | (millions) | | | | | Beginning balance | $ | 73 |
| $ | 7 |
| $ | 102 |
| $ | (7 | ) | Total realized and unrealized gains (losses): | | | | | Included in earnings | (10 | ) | (2 | ) | (1 | ) | 109 |
| Included in regulatory assets/liabilities | 47 |
| 39 |
| 18 |
| 53 |
| Settlements | 10 |
| 2 |
| 1 |
| (109 | ) | Ending balance | $ | 120 |
| $ | 46 |
| $ | 120 |
| $ | 46 |
|
The gains and losses included in earnings in the Level 3 fair value category were classified in electric fuel and other energy-related purchases in Virginia Power's Consolidated Statements of Income for the three and nine months ended September 30, 2015 and 2014. There were no unrealized gains or losses included in earnings in the Level 3 fair value category relating to assets/liabilities still held at the reporting date for the three and nine months ended September 30, 2015 and 2014.
Dominion Gas The following table presents Dominion Gas' quantitative information about Level 3 fair value measurements at September 30, 2015. The range and weighted average are presented in dollars for market price inputs and percentages for credit spreads.
| | | | | | | | | | | Fair Value (millions) | Valuation Techniques | Unobservable Input | | Range | Weighted Average(1) | Assets: | | | | | | | Physical and Financial Forwards and Futures: | | | | | | | NGLs | $ | 4 |
| Discounted Cash Flow | Market Price (per Gal) | (2) | 0 - 2 | 1 | Total assets | $ | 4 |
| | | | | |
| | (1) | Averages weighted by volume. |
| | (2) | Represents market prices beyond defined terms for Levels 1 and 2. |
Sensitivity of the fair value measurements to changes in the significant unobservable inputs is as follows: | | | | | Significant Unobservable Inputs | Position | Change to Input | Impact on Fair Value Measurement | Market Price | Buy | Increase (decrease) | Gain (loss) | Market Price | Sell | Increase (decrease) | Loss (gain) |
The following table presents Dominion Gas' assets and liabilities for derivatives that are measured at fair value on a recurring basis for each hierarchy level, including both current and noncurrent portions: | | | | | | | | | | | | | | | Level 1 | Level 2 | Level 3 | Total | (millions) | | | | | At September 30, 2015 | | | | | Assets: | | | | | Commodity | $ | — |
| $ | 5 |
| $ | 4 |
| $ | 9 |
| Total Assets | $ | — |
| $ | 5 |
| $ | 4 |
| $ | 9 |
| Liabilities: | |
| |
| |
| |
| Commodity | $ | — |
| $ | 1 |
| $ | — |
| $ | 1 |
| Interest rate | — |
| 17 |
| — |
| 17 |
| Total liabilities | $ | — |
| $ | 18 |
| $ | — |
| $ | 18 |
| At December 31, 2014 | |
| |
| |
| |
| Assets: | | | | | Commodity | $ | — |
| $ | — |
| $ | 2 |
| $ | 2 |
| Total Assets | $ | — |
| $ | — |
| $ | 2 |
| $ | 2 |
| Liabilities: | |
| |
| |
| |
| Interest rate | $ | — |
| $ | 9 |
| $ | — |
| $ | 9 |
| Total liabilities | $ | — |
| $ | 9 |
| $ | — |
| $ | 9 |
|
The following table presents the net change in Dominion Gas' assets and liabilities for derivatives measured at fair value on a recurring basis and included in the Level 3 fair value category: | | | | | | | | | | | | | | | Three Months Ended September 30, | Nine Months Ended September 30, | | 2015 | 2014 | 2015 | 2014 | (millions) | | | | | Beginning balance | $ | (1 | ) | $ | (3 | ) | $ | 2 |
| $ | (6 | ) | Total realized and unrealized gains (losses): | |
| |
| |
| |
| Included in earnings | — |
| (1 | ) | 1 |
| (8 | ) | Included in other comprehensive income (loss) | 5 |
| 5 |
| (7 | ) | 8 |
| Settlements | — |
| — |
| (1 | ) | 7 |
| Transfers out of Level 3(1) | — |
| — |
| 9 |
| — |
| Ending balance | $ | 4 |
| $ | 1 |
| $ | 4 |
| $ | 1 |
|
| | (1) | In March 2015, Dominion Gas changed the classification of certain short term NGL derivatives from Level 3 to Level 2 due to an increase in liquidity in financial forward markets. The transfers out of Level 3 that relate to NGLs for the three and nine months ended September 30, 2015 are $--- million and $9 million, respectively. |
The gains and losses included in earnings in the Level 3 fair value category were classified in operating revenue in Dominion Gas' Consolidated Statements of Income for the three and nine months ended September 30, 2015 and 2014. There were no unrealized gains or losses included in earnings in the Level 3 fair value category relating to assets/liabilities still held at the reporting date for the three and nine months ended September 30, 2015 and 2014.
Fair Value of Financial Instruments Substantially all of the Companies' financial instruments are recorded at fair value, with the exception of the instruments described below, which 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, restricted cash (which is recorded in other current assets), customer and other receivables, short-term debt, affiliated current borrowings, payables to affiliates and accounts payable are representative of fair value because of the short-term nature of these instruments. For the Companies' financial instruments that are not recorded at fair value, the carrying amounts and estimated fair values are as follows: | | | | | | | | | | | | | | | September 30, 2015 | December 31, 2014 | | Carrying
Amount | Estimated Fair
Value(1) | Carrying
Amount | Estimated Fair
Value(1) | (millions) | | | | | Dominion | | | | | Long-term debt, including securities due within one year(2)(3) | $ | 21,318 |
| $ | 22,923 |
| $ | 19,723 |
| $ | 21,881 |
| Junior subordinated notes(3) | 1,370 |
| 1,290 |
| 1,374 |
| 1,396 |
| Remarketable subordinated notes(3) | 2,085 |
| 2,214 |
| 2,083 |
| 2,362 |
| Virginia Power | | | | | Long-term debt, including securities due within one year(3) | $ | 9,629 |
| $ | 10,764 |
| $ | 8,937 |
| $ | 10,293 |
| Dominion Gas | | | | | Long-term debt(3) | $ | 2,595 |
| $ | 2,618 |
| $ | 2,594 |
| $ | 2,672 |
|
| | (1) | Fair value is estimated using market prices, where available, and interest rates currently available for issuance of debt with similar terms and remaining maturities. All fair value measurements are classified as Level 2. The carrying amount of debt issues with short-term maturities and variable rates refinanced at current market rates is a reasonable estimate of their fair value. |
| | (2) | At both September 30, 2015 and December 31, 2014, includes the valuation of certain fair value hedges associated with fixed rate debt of approximately $19 million. |
| | (3) | Carrying amount includes amounts which represent the unamortized discount and/or premium. |
|