Note 8. 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, 2017, as updated in Current Report on Form 8-K, filed June 6, 2018. 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, futures, and swaps contracts. An option model is used to value Level 3 physical options. The discounted cash flow model for forwards, futures, and swaps 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, certain 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 Energy’s quantitative information about Level 3 fair value measurements at September 30, 2018. 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⁾	$	65	Discounted cash flow	Market price (per Dth)	⁽³⁾	(2) - 7		—
FTRs		12	Discounted cash flow	Market price (per MWh)	⁽³⁾	(1) - 7		1
Physical options:
Natural gas		2	Option model	Market price (per Dth)	⁽³⁾	1 - 7		3
				Price volatility	⁽⁴⁾	13% - 44%		23	%
Electricity		19	Option model	Market price (per MWh)	⁽³⁾	27 - 57		42
				Price volatility	⁽⁴⁾	4% - 61%		37	%
Total assets	$	98
Liabilities
Financial forwards:
FTRs	$	6	Discounted cash flow	Market price (per MWh)	⁽³⁾	(1) - 6		—
Total liabilities	$	6

(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 Energy

The following table presents Dominion Energy’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, 2018
Assets
Derivatives:
Commodity	$	—	$	50	$	98	$	148
Interest rate		—		117		—		117
Foreign currency		—		32		—		32
Investments⁽¹⁾:
Equity securities:
U.S.		3,785		—		—		3,785
Fixed income securities:
Corporate debt instruments		—		437		—		437
Government securities		350		768		—		1,118
Cash equivalents and other		13		—		—		13
Total assets	$	4,148	$	1,404	$	98	$	5,650
Liabilities
Derivatives:
Commodity	$	—	$	94	$	6	$	100
Interest rate		—		42		—		42
Foreign currency		—		3		—		3
Total liabilities	$	—	$	139	$	6	$	145
At December 31, 2017
Assets
Derivatives:
Commodity	$	—	$	101	$	157	$	258
Interest rate		—		17		—		17
Foreign currency		—		32		—		32
Investments⁽¹⁾:
Equity securities:
U.S.		3,493		—		—		3,493
Fixed income securities:
Corporate debt instruments		—		444		—		444
Government securities		307		794		—		1,101
Cash equivalents and other		34		—		—		34
Total assets	$	3,834	$	1,388	$	157	$	5,379
Liabilities
Derivatives:
Commodity	$	—	$	190	$	7	$	197
Interest rate		—		85		—		85
Foreign currency		—		2		—		2
Total liabilities	$	—	$	277	$	7	$	284

(1)

Includes investments held in the nuclear decommissioning and rabbi trusts. Excludes $217 million and $88 million of assets at September 30, 2018 and December 31, 2017, respectively, measured at fair value using NAV (or its equivalent) as a practical expedient which are not required to be categorized in the fair value hierarchy.

The following table presents the net change in Dominion Energy's assets and liabilities measured at fair value on a recurring basis and included in the Level 3 fair value category:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
(millions)
Beginning balance	$	119		$	152		$	150		$	139
Total realized and unrealized gains (losses):
Included in earnings		(7	)		(11	)		(27	)		(36	)
Included in other comprehensive income		—			—			1			—
Included in regulatory assets/liabilities		(16	)		11			(26	)		34
Settlements		(4	)		1			(7	)		13
Transfers out of Level 3		—			—			1			3
Ending balance	$	92		$	153		$	92		$	153
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

The following table presents Dominion Energy’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, 2018
Total gains (losses) included in earnings	$	—		$	(7	)	$	(7	)
Three Months Ended September 30, 2017
Total gains (losses) included in earnings	$	1		$	(12	)	$	(11	)
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, 2018
Total gains (losses) included in earnings	$	(2	)	$	(25	)	$	(27	)
Nine Months Ended September 30, 2017
Total gains (losses) included in earnings	$	1		$	(37	)	$	(36	)
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, 2018. 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⁾	$	58	Discounted cash flow	Market price (per Dth)	⁽³⁾	(2) - 7		(1	)
FTRs		12	Discounted cash flow	Market price (per MWh)	⁽³⁾	(1) - 7		1
Physical options:
Natural gas		2	Option model	Market price (per Dth)	⁽³⁾	1 - 7		3
				Price volatility	⁽⁴⁾	13% - 44%		23	%
Electricity		19	Option model	Market price (per MWh)	⁽³⁾	27 - 57		42
				Price volatility	⁽⁴⁾	4% - 61%		37	%
Total assets	$	91
Liabilities
Financial forwards:
FTRs	$	5	Discounted cash flow	Market price (per MWh)	⁽³⁾	(1) - 6		—
Total liabilities	$	5

(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, 2018
Assets
Derivatives:
Commodity	$	—	$	14	$	91	$	105
Interest rate		—		65		—		65
Investments⁽¹⁾:
Equity securities:
U.S.		1,699		—		—		1,699
Fixed income securities:
Corporate debt instruments		—		218		—		218
Government securities		158		348		—		506
Total assets	$	1,857	$	645	$	91	$	2,593
Liabilities
Derivatives:
Commodity	$	—	$	3	$	5	$	8
Total liabilities	$	—	$	3	$	5	$	8
At December 31, 2017
Assets
Derivatives:
Commodity	$	—	$	14	$	152	$	166
Investments⁽¹⁾:
Equity securities:
U.S.		1,566		—		—		1,566
Fixed income securities:
Corporate debt instruments		—		224		—		224
Government securities		168		326		—		494
Cash equivalents and other		16		—		—		16
Total assets	$	1,750	$	564	$	152	$	2,466
Liabilities
Derivatives:
Commodity	$	—	$	4	$	5	$	9
Interest rate		—		57		—		57
Total liabilities	$	—	$	61	$	5	$	66

(1)

Includes investments held in the nuclear decommissioning trusts. Excludes $151 million and $27 million of assets at September 30, 2018 and December 31, 2017, respectively, measured at fair value using NAV (or its equivalent) as a practical expedient which are not required to be categorized in the fair value hierarchy.

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						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
(millions)
Beginning balance	$	115		$	152		$	147		$	143
Total realized and unrealized gains (losses):
Included in earnings		(6	)		(12	)		(25	)		(37	)
Included in regulatory assets/liabilities		(19	)		11			(30	)		34
Settlements		(4	)		1			(6	)		12
Ending balance	$	86		$	152		$	86		$	152

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, 2018 and 2017. 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, 2018 and 2017.

Dominion Energy Gas

The following table presents Dominion Energy 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, 2018
Assets
Interest rate	$	—	$	8	$	—	$	8
Foreign currency		—		32		—		32
Total assets	$	—	$	40	$	—	$	40
Liabilities
Commodity	$	—	$	9	$	—	$	9
Interest rate		—		1		—		1
Foreign currency		—		3		—		3
Total liabilities	$	—	$	13	$	—	$	13
At December 31, 2017
Assets
Foreign currency	$	—	$	32	$	—	$	32
Total assets	$	—	$	32	$	—	$	32
Liabilities
Commodity	$	—	$	4	$	2	$	6
Foreign currency		—		2		—		2
Total liabilities	$	—	$	6	$	2	$	8

The following table presents the net change in Dominion Energy Gas’ assets and liabilities for derivatives measured at fair value on a recurring basis and included in the Level 3 fair value category. There were no net changes in assets and liabilities measured at fair value on a recurring basis and included in the Level 3 fair value category for the three months ended September 30, 2018 and 2017.

	Nine Months Ended
	September 30,
	2018			2017
(millions)
Beginning balance	$	(2	)	$	(2	)
Total realized and unrealized gains (losses):
Included in other comprehensive income (loss)		1			(1	)
Transfers out of Level 3		1			3
Ending balance	$	—		$	—

There were no gains or losses included in earnings in the Level 3 fair value category for the nine months ended September 30, 2018 and 2017. 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 nine months ended September 30, 2018 and 2017.

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 and equivalents, customer and other receivables, affiliated 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, 2018				December 31, 2017
	Carrying Amount		Estimated Fair Value⁽¹⁾		Carrying Amount		Estimated Fair Value⁽¹⁾
(millions)
Dominion Energy
Long-term debt, including securities due within one year⁽²⁾	$	30,401	$	31,488	$	28,666	$	31,233
Junior subordinated notes⁽³⁾		3,431		3,432		3,981		4,102
Remarketable subordinated notes⁽³⁾		1,384		1,324		1,379		1,446
Credit facility borrowings		73		73		—		—
Virginia Power
Long-term debt, including securities due within one year⁽³⁾	$	11,092	$	11,759	$	11,346	$	12,842
Dominion Energy Gas
Long-term debt, including securities due within one year⁽⁴⁾	$	4,061	$	4,061	$	3,570	$	3,719

(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 or premium, and foreign currency remeasurement adjustments. At September 30, 2018 and December 31, 2017, includes the valuation of certain fair value hedges associated with fixed rate debt of $(65) million and $(22) million, respectively.

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

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