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, 2015. See Note 9 in this report for further information about the Companies' derivatives and hedge accounting activities.

Dominion and Dominion Gas apply fair value measurements to foreign currency swaps used to manage the foreign currency exchange rate risk related to interest and principal payments denominated in foreign currencies. These swaps are designated as cash flow hedges for accounting purposes and are categorized as Level 2.

The inputs and assumptions used in measuring the fair value for foreign currency swaps include the following:


•	Foreign currency forward exchange rates


•	Credit quality of counterparties and the Companies


•	Notional value


•	Credit enhancements


•	Time value

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, and risk-free rate of return. 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, 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, 2016. The range and weighted average are presented in dollars for market price inputs and percentages for price volatility.



	Fair Value (millions)		Valuation Techniques	Unobservable Input		Range	Weighted Average⁽¹⁾
Assets
Physical and financial forwards and futures:
Natural gas⁽²⁾	$	85	Discounted cash flow	Market price (per Dth)	⁽³⁾	(2) - 7	—
FTRs	7		Discounted cash flow	Market price (per MWh)	⁽³⁾	(6) - 6	1
Physical and financial options:
Natural gas	4		Option model	Market price (per Dth)	⁽³⁾	2 - 7	3
				Price volatility	⁽⁴⁾	19% - 46%	24	%
Total assets	$	96
Liabilities
Physical and financial forwards and futures:
Natural gas⁽²⁾	$	4	Discounted cash flow	Market price (per Dth)	⁽³⁾	(2) - 4	1
FTRs	2		Discounted cash flow	Market price (per MWh)	⁽³⁾	(11) - 6	1
Physical and financial options:
Natural gas	1		Option model	Market price (per Dth)	⁽³⁾	2 - 4	3
				Price volatility	⁽⁴⁾	30% - 46%	38	%
Total liabilities	$	7


(1)	Averages weighted by volume.


(2)	Includes basis.


(3)	Represents market prices beyond defined terms for Levels 1 and 2.


(4)	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)

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, 2016
Assets
Derivatives:
Commodity	$	—	$	172	$	96	$	268
Interest rate	—		19		—		19
Foreign currency	—		8		—		8
Investments⁽¹⁾:
Equity securities:
United States:
Large cap	2,712		—		—		2,712
REIT	67		—		—		67
Other	6		—		—		6
Non-United States:
Large cap	10		—		—		10
Fixed income:
Corporate debt instruments	—		518		—		518
United States Treasury securities and agency debentures	438		231		—		669
State and municipal	—		372		—		372
Other	—		109		—		109
Cash equivalents and other	8		—		—		8
Total assets	$	3,241	$	1,429	$	96	$	4,766
Liabilities
Derivatives:
Commodity	$	—	$	104	$	7	$	111
Interest rate	—		307		—		307
Foreign currency	—		4		—		4
Total liabilities	$	—	$	415	$	7	$	422
At December 31, 2015
Assets
Derivatives:
Commodity	$	1	$	249	$	114	$	364
Interest rate	—		24		—		24
Investments⁽¹⁾:
Equity securities:
United States:
Large cap	2,547		—		—		2,547
REIT	63		—		—		63
Other	5		—		—		5
Non-United States:
Large cap	10		—		—		10
Fixed income:



Corporate debt instruments	—		437		—		437
United States Treasury securities and agency debentures	458		201		—		659
State and municipal	—		376		—		376
Other	—		100		—		100
Cash equivalents and other	2		2		—		4
Total assets	$	3,086	$	1,389	$	114	$	4,589
Liabilities
Derivatives:
Commodity	$	—	$	141	$	19	$	160
Interest rate	—		183		—		183
Total liabilities	$	—	$	324	$	19	$	343


(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,
	2016			2015			2016			2015
(millions)
Beginning balance	$	124		$	71		$	95		$	107
Total realized and unrealized gains (losses):
Included in earnings	(7		)	(9		)	(23		)	1
Included in other comprehensive income (loss)	—			5			2			(7		)
Included in regulatory assets/liabilities	(37		)	47			(5		)	18
Settlements	9			10			27			1
Transfers out of Level 3	—			(1		)	(7		)	3
Ending balance	$	89		$	123		$	89		$	123
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

The following table presents Dominion's classification of gains and losses included in earnings in the Level 3 fair value category.



	Operating Revenue		Electric Fuel and Other Energy-Related Purchases			Total
(millions)
Three Months Ended September 30, 2016
Total gains (losses) included in earnings	$	—	$	(7	)	$	(7	)
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
Nine Months Ended September 30, 2016
Total gains (losses) included in earnings	$	—	$	(23	)	$	(23	)
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

Virginia Power

The following table presents Virginia Power's quantitative information about Level 3 fair value measurements at September 30, 2016. The range and weighted average are presented in dollars for market price inputs and percentages for price volatility.



	Fair Value (millions)		Valuation Techniques	Unobservable Input		Range	Weighted Average⁽¹⁾
Assets
Physical and financial forwards and futures:
Natural gas⁽²⁾	$	81	Discounted cash flow	Market price (per Dth)	⁽³⁾	(2) - 7	—
FTRs	7		Discounted cash flow	Market price (per MWh)	⁽³⁾	(6) - 6	1
Physical and financial options:
Natural gas	2		Option model	Market price (per Dth)	⁽³⁾	2 - 7	3
				Price volatility	⁽⁴⁾	19% - 33%	24	%
Total assets	$	90
Liabilities
Physical and financial forwards and futures:
FTRs	$	2	Discounted cash flow	Market price (per MWh)	⁽³⁾	(11) - 6	1
Total liabilities	$	2


(1)	Averages weighted by volume.


(2)	Includes basis.


(3)	Represents market prices beyond defined terms for Levels 1 and 2.


(4)	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)

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, 2016
Assets
Derivatives:
Commodity	$	—	$	26	$	90	$	116
Interest rate	—		2		—		2
Investments⁽¹⁾:
Equity securities:
United States large cap	1,183		—		—		1,183
REIT	67		—		—		67
Fixed income:
Corporate debt instruments	—		298		—		298
United States Treasury securities and agency debentures	144		107		—		251
State and municipal	—		174		—		174
Other	—		29		—		29
Total assets	$	1,394	$	636	$	90	$	2,120
Liabilities
Derivatives:
Commodity	$	—	$	22	$	2	$	24
Interest rate	—		267		—		267
Total liabilities	$	—	$	289	$	2	$	291
At December 31, 2015
Assets
Derivatives:
Commodity	$	—	$	13	$	101	$	114
Interest rate	—		13		—		13
Investments⁽¹⁾:
Equity securities:
United States large cap	1,100		—		—		1,100
REIT	63		—		—		63
Fixed income:
Corporate debt instruments	—		238		—		238
United States Treasury securities and agency debentures	180		79		—		259
State and municipal	—		175		—		175
Other	—		34		—		34
Total assets	$	1,343	$	552	$	101	$	1,996
Liabilities
Derivatives:
Commodity	$	—	$	19	$	8	$	27
Interest rate	—		59		—		59
Total liabilities	$	—	$	78	$	8	$	86


(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,
	2016			2015			2016			2015
(millions)
Beginning balance	$	125		$	73		$	93		$	102
Total realized and unrealized gains (losses):
Included in earnings	(7		)	(10		)	(24		)	(1		)
Included in regulatory assets/liabilities	(37		)	47			(5		)	18
Settlements	7			10			24			1
Ending balance	$	88		$	120		$	88		$	120

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, 2016 and 2015. 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, 2016 and 2015.

Dominion Gas

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, 2016
Assets
Commodity	$	—	$	6	$	—	$	6
Foreign currency	—		8		—		8
Total Assets	$	—	$	14	$	—	$	14
Liabilities
Commodity	$	—	$	2	$	—	$	2
Foreign currency	—		4		—		4
Total liabilities	$	—	$	6	$	—	$	6
At December 31, 2015
Assets
Commodity	$	—	$	5	$	6	$	11
Total Assets	$	—	$	5	$	6	$	11
Liabilities
Interest rate	$	—	$	14	$	—	$	14
Total liabilities	$	—	$	14	$	—	$	14

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,
	2016		2015			2016			2015
(millions)
Beginning balance	$	—	$	(1	)	$	6		$	2
Total realized and unrealized gains (losses):
Included in earnings	—		—			—			1
Included in other comprehensive income (loss)	—		5			2			(7		)
Settlements	—		—			—			(1		)
Transfers out of Level 3	—		—			(8		)	9
Ending balance	$	—	$	4		$	—		$	4

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 nine months ended September 30, 2015. 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, 2016 and 2015.

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, customer, affiliated, 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, 2016				December 31, 2015
	Carrying Amount		Estimated Fair Value⁽¹⁾		Carrying Amount		Estimated Fair Value⁽¹⁾
(millions)
Dominion
Long-term debt, including securities due within one year⁽²⁾	$	26,287	$	29,077	$	21,873	$	23,210
Junior subordinated notes⁽³⁾	2,980		3,030		1,340		1,192
Remarketable subordinated notes⁽³⁾	2,371		2,392		2,080		2,129
Virginia Power
Long-term debt, including securities due within one year⁽³⁾	$	9,642	$	11,259	$	9,368	$	10,400
Dominion Gas
Long-term debt, including securities due within one year⁽⁴⁾	$	3,945	$	4,139	$	3,269	$	3,299


(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)	Carrying amount includes amounts which represent the unamortized debt issuance costs, discount and/or premium, and foreign currency remeasurement adjustments. At September 30, 2016 and December 31, 2015, includes the valuation of certain fair value hedges associated with fixed rate debt of $14 million and $7 million, respectively.


(3)	Carrying amount includes amounts which represent the unamortized debt issuance costs, discount and/or premium.


(4)	Carrying amount includes amounts which represent the unamortized debt issuance costs, discount and/or premium, and foreign currency remeasurement adjustments.