FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. However, the use of a mid-market pricing convention (the mid-point between bid and ask prices) is permitted. Fair values are based on assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and the risks inherent in valuation techniques and the inputs to valuations. This includes not only the credit standing of counterparties involved and the impact of credit enhancements but also the impact of Dominion's and Virginia Power's own nonperformance risk on their liabilities. Fair value measurements assume that the transaction occurs in the principal market for the asset or liability (the market with the most volume and activity for the asset or liability from the perspective of the reporting entity), or in the absence of a principal market, the most advantageous market for the asset or liability (the market in which the reporting entity would be able to maximize the amount received or minimize the amount paid). Dominion and Virginia Power apply fair value measurements to certain assets and liabilities including commodity and interest rate derivative instruments, and nuclear decommissioning trust and other investments including those held in Dominion's rabbi, pension and other postretirement benefit plan trusts, in accordance with the requirements described above. The Companies apply credit adjustments to their derivative fair values in accordance with the requirements described above. These credit adjustments are currently not material to the derivative fair values.

The Companies maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is based on actively-quoted market prices, if available. In the absence of actively-quoted market prices, they seek price information from external sources, including broker quotes and industry publications. When evaluating pricing information provided by brokers and other pricing services, they consider whether the broker is willing and able to trade at the quoted price, if the broker quotes are based on an active market or an inactive market and the extent to which brokers are utilizing a particular model if pricing is not readily available. If pricing information from external sources is not available, or if the Companies believe that observable pricing is not indicative of fair value, judgment is required to develop the estimates of fair value. In those cases they must estimate prices based on available historical and near-term future price information and certain statistical methods, including regression analysis, that reflect their market assumptions.

For options and contracts with option-like characteristics where observable pricing information is not available from external sources, the Companies generally use a modified Black-Scholes Model that considers time value, the volatility of the underlying commodities and other relevant assumptions when estimating fair value. The Companies use other option models under special circumstances, including a Spread Approximation Model when contracts include different commodities or commodity locations and a Swing Option Model when contracts allow either the buyer or seller the ability to exercise within a range of quantities. For contracts with unique characteristics, the Companies may estimate fair value using a discounted cash flow approach deemed appropriate in the circumstances and applied consistently from period to period. For individual contracts, the use of different valuation models or assumptions could have a significant effect on the contract's estimated fair value.

The inputs and assumptions used in measuring fair value include the following:

For commodity and foreign currency derivative contracts:


•	Forward commodity prices


•	Forward foreign currency prices


•	Price volatility


•	Volumes


•	Commodity location


•	Interest rates


•	Credit quality of counterparties and Dominion and Virginia Power


•	Credit enhancements


•	Time value

For interest rate derivative contracts:


•	Interest rate curves


•	Credit quality of counterparties and Dominion and Virginia Power


•	Credit enhancements


•	Time value

For investments:


•	Quoted securities prices and indices


•	Securities trading information including volume and restrictions


•	Maturity


•	Interest rates


•	Credit quality


•	NAV (only for alternative investments)

Dominion and Virginia Power regularly evaluate and validate the inputs used to estimate fair value by a number of methods, including review and verification of models, as well as various market price verification procedures such as the use of pricing services and multiple broker quotes to support the market price of the various commodities and investments in which the Companies transact.

The Companies also utilize the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value, into three broad levels:

•Level 1-Quoted prices (unadjusted) in active markets for identical assets and liabilities that they have the ability to access at the measurement date. Instruments categorized in Level 1 primarily consist of financial instruments such as the majority of exchange-traded derivatives, and exchange-listed equities, mutual funds and certain Treasury securities held in nuclear decommissioning trust funds for Dominion and Virginia Power and rabbi and benefit plan trust funds for Dominion.

•Level 2-Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived from observable market data by correlation or other means. Instruments categorized in Level 2 primarily include non-exchange traded derivatives such as over-the-counter commodity forwards and swaps, interest rate swaps, foreign currency forwards and options, certain Treasury securities, money market funds, and corporate, state and municipal debt securities held in nuclear decommissioning trust funds for Dominion and Virginia Power and rabbi and benefit plan trust funds for Dominion.

•Level 3-Unobservable inputs for the asset or liability, including situations where there is little, if any, market activity for the asset or liability. Instruments categorized in Level 3 for Dominion and Virginia Power consist of long-dated commodity derivatives, FTRs and other modeled commodity derivatives. Additional instruments categorized in Level 3 for Dominion include NGLs and natural gas peaking options and alternative investments, consisting of investments in partnerships, joint ventures and other alternative investments, held in benefit plan trust funds.

The fair value hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. In these cases, the lowest level input that is significant to a fair value measurement in its entirety determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability.

Fair value measurements are categorized as Level 3 when a significant amount of price or other inputs that are considered to be unobservable are used in their valuations. Long-dated commodity derivatives are generally based on unobservable inputs due to the length of time to settlement and the absence of market activity and are therefore categorized as Level 3. For NGL derivatives, market illiquidity requires a valuation based on proxy markets that do not always correlate to the actual instrument, therefore they are categorized as Level 3. FTRs are categorized as Level 3 fair value measurements because the only relevant pricing available comes from ISO auctions, which are generally not considered to be liquid markets. Other modeled commodity derivatives have unobservable inputs in their valuation, mostly due to non-transparent and illiquid markets. Alternative investments are categorized as Level 3 due to the absence of quoted market prices, illiquidity and the long-term nature of these assets. These investments are generally valued using NAV based on the proportionate share of the fair value as determined by reference to the most recent audited fair value financial statements or fair value statements provided by the investment manager adjusted for any significant events occurring between the investment manager's and the Companies' measurement date.

For derivative contracts, Dominion and Virginia Power recognize transfers among Level 1, Level 2 and Level 3 based on fair values as of the first day of the month in which the transfer occurs. Transfers out of Level 3 represent assets and liabilities that were previously classified as Level 3 for which the inputs became observable for classification in either Level 1 or Level 2. Because the activity and liquidity of commodity markets vary substantially between regions and time periods, the availability of observable inputs for substantially the full term and value of the Companies' over-the-counter derivative contracts is subject to change.

At December 31, 2011, Dominion's and Virginia Power's net balance of commodity derivatives categorized as Level 3 fair value measurements was a net liability of $71 million and $28 million, respectively. A hypothetical 10% increase in commodity prices would increase Dominion's and Virginia Power's net liability by $73 million and $2 million, respectively. A hypothetical 10% decrease in commodity prices would decrease Dominion's and Virginia Power's net liability by $74 million and $2 million, respectively.

Nonrecurring Fair Value Measurements

MERCHANT POWER STATIONS

In June 2010, Dominion evaluated State Line for impairment due to the station's relatively low level of profitability combined with the EPA's issuance of a new stringent 1-hour primary NAAQS for SO₂ that would likely require significant environmental capital expenditures in the future. As a result of this evaluation, Dominion recorded an impairment charge of $163 million ($107 million after-tax) in other operations and maintenance expense in its Consolidated Statement of Income, to write down State Line's long-lived assets to their estimated fair value of $59 million.

During March 2011, Dominion determined that it was unlikely that State Line would participate in the May 2011 PJM capacity base residual auction that would commit State Line's capacity from June 2014 through May 2015. This determination reflected an expectation that margins for coal-fired generation will remain compressed in the 2014 and 2015 period in combination with the expectation that State Line may be impacted during the same time period by environmental regulations that would likely require significant capital expenditures. As a result, Dominion evaluated State Line for impairment since it was more likely than not that State Line would be retired before the end of its previously estimated useful life. As a result of this evaluation, Dominion recorded an impairment charge of $55 million ($39 million after-tax) reflected in other operations and maintenance expense in its Consolidated Statement of Income, to write down State Line's long-lived assets to their estimated fair value of less than $1 million.

In December 2010, Dominion recorded an impairment charge of $31 million ($20 million after-tax) in other operations and maintenance expense in its Consolidated Statement of Income, to write down the long-lived assets of Salem Harbor to their estimated fair value of less than $1 million as a result of profitability issues.

As management was not aware of any recent market transactions for comparable assets with sufficient transparency to develop a market approach to fair value, Dominion used the income approach (discounted cash flows) to estimate the fair value of State Line's and Salem Harbor's long-lived assets in these impairment tests. These were considered Level 3 fair value measurements due to the use of significant unobservable inputs including estimates of future power and other commodity prices.

EMISSIONS ALLOWANCES

In September 2010, Virginia Power evaluated its SO₂ emissions allowances not expected to be consumed by its generating units for potential impairment due to the significant decline in market prices since the July 2010 release of the EPA's proposed replacement rule for CAIR, ultimately known as CSAPR. As a result of this evaluation, Virginia Power recorded an impairment charge of $13 million ($8 million after-tax) in other operations and maintenance expense in its Consolidated Statement of Income, to write down its SO₂ emissions allowances not expected to be consumed to their estimated fair value of less than $1 million.

In the third quarter of 2011, Dominion and Virginia Power evaluated their SO₂ emissions allowances not expected to be consumed by generating units for potential impairment due to the EPA's issuance of CSAPR as discussed in Note 23. Prior to the issuance of CSAPR, Dominion and Virginia Power held $57 million and $43 million, respectively, of SO₂ emissions allowances obtained for ARP and CAIR compliance. Due to CSAPR's establishment of a new allowance program and the elimination of CAIR, Dominion and Virginia Power have more SO₂ emissions allowances than needed for ARP compliance. As a result of this evaluation, Dominion and Virginia Power recorded an impairment charge of $57 million ($34 million after-tax) and $43 million ($26 million after-tax), respectively, in other operations and maintenance expense in their Consolidated Statements of Income, to write down these emissions allowances to their estimated fair value of less than $1 million.

To estimate the value of these emissions allowances in both impairment tests, Dominion utilized a market approach by obtaining broker quotes to validate CSAPR's impact on emissions allowance prices. However, due to limited market activity for future SO₂ vintage year allowances, these are considered a Level 3 fair value measurement.

Recurring Fair Value Measurements

Fair value measurements are separately disclosed by level within the fair value hierarchy with a separate reconciliation of fair value measurements categorized as Level 3. Fair value disclosures for assets held in Dominion's pension and other postretirement benefit plans are presented in Note 22.

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 December 31, 2011
Assets:
Derivatives:
Commodity	$	44	$	828	$	93	$	965
Interest Rate	—		105		—		105
Investments⁽¹⁾:
Equity securities:
U.S.:
Large Cap	1,718		—		—		1,718
Other	51		—		—		51
Non-U.S.:
Large Cap	10		—		—		10
Fixed Income:
Corporate debt instruments	—		332		—		332
U.S. Treasury securities and agency debentures	277		181		—		458
State and municipal	—		329		—		329
Other	—		23		—		23
Cash equivalents and other	—		60		—		60
Restricted cash equivalents	—		141		—		141
Total assets	$	2,100	$	1,999	$	93	$	4,192
Liabilities:
Derivatives:
Commodity	$	10	$	714	$	164	$	888
Interest Rate	—		269		—		269
Total liabilities	$	10	$	983	$	164	$	1,157
At December 31, 2010
Assets:
Derivatives:
Commodity	$	62	$	734	$	47	$	843
Interest Rate	—		54		—		54
Investments⁽¹⁾:
Equity securities:
U.S.:
Large Cap	1,709		—		—		1,709
Other	56		—		—		56
Non-U.S.:
Large Cap	12		—		—		12
Fixed Income:
Corporate debt instruments	—		327		—		327
U.S. Treasury securities and agency debentures	228		165		—		393
State and municipal	—		286		—		286
Other	—		19		—		19
Cash equivalents and other	25		97		—		122
Restricted cash equivalents	—		400		—		400
Total assets	$	2,092	$	2,082	$	47	$	4,221
Liabilities:
Derivatives:
Commodity	$	12	$	716	$	97	$	825
Interest Rate	—		5		—		5
Total liabilities	$	12	$	721	$	97	$	830


(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:



	2011			2010			2009
(millions)
Balance at January 1,	$	(50	)	$	(66	)	$	99
Total realized and unrealized gains (losses):
Included in earnings	(77		)	43			(148		)
Included in other comprehensive income (loss)	14			(49		)	(188		)
Included in regulatory assets/liabilities	(42		)	24			52
Settlements	88			(38		)	126
Transfers out of Level 3	(4		)	36			(7		)
Balance at December 31,	$	(71	)	$	(50	)	$	(66	)
The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date	$	22		$	(4	)	$	(3	)

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



	Operating Revenue			Electric Fuel and Energy Purchases			Purchased Gas			Total
(millions)
Year Ended December 31, 2011
Total gains (losses) included in earnings	$	(32	)	$	(45	)	$	—		$	(77	)
The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date	22			—			—			22

Year Ended December 31, 2010
Total gains (losses) included in earnings	$	(4	)	$	51		$	(4	)	$	43
The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date	(4		)	—			—			(4		)

Year Ended December 31, 2009
Total gains (losses) included in earnings	$	29		$	(165	)	$	(12	)	$	(148	)
The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date	1			—			(4		)	(3		)

VIRGINIA POWER

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 December 31, 2011
Assets:
Derivatives:
Commodity	$	—	$	—	$	2	$	2
Investments⁽¹⁾:
Equity securities:
U.S.:
Large Cap	679		—		—		679
Other	23		—		—		23
Fixed Income:
Corporate debt instruments	—		214		—		214
U.S. Treasury securities and agency debentures	107		63		—		170
State and municipal	—		125		—		125
Other	—		16		—		16
Cash equivalents and other	—		40		—		40
Restricted cash equivalents	—		32		—		32
Total assets	$	809	$	490	$	2	$	1,301
Liabilities:
Derivatives:
Commodity	$	—	$	17	$	30	$	47
Interest Rate	—		100		—		100
Total Liabilities	$	—	$	117	$	30	$	147
At December 31, 2010
Assets:
Derivatives:
Commodity	$	—	$	12	$	15	$	27
Investments⁽¹⁾:
Equity securities:
U.S.:
Large Cap	676		—		—		676
Other	25		—		—		25
Fixed Income:
Corporate debt instruments	—		215		—		215
U.S. Treasury securities and agency debentures	80		63		—		143
State and municipal	—		102		—		102
Other	—		15		—		15
Cash equivalents and other	10		61		—		71
Restricted cash equivalents	—		169		—		169
Total assets	$	791	$	637	$	15	$	1,443
Liabilities:
Derivatives:
Commodity	$	—	$	5	$	1	$	6
Total Liabilities	$	—	$	5	$	1	$	6


(1)	Includes investments held in the nuclear decommissioning 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:



	2011			2010			2009
(millions)
Balance at January 1,	$	14		$	(10	)	$	(69	)
Total realized and unrealized gains (losses):
Included in earnings	(45		)	51			(165		)
Included in regulatory assets/liabilities	(42		)	24			53
Settlements	45			(51		)	170
Transfers out of Level 3	—			—			1
Balance at December 31,	$	(28	)	$	14		$	(10	)

The gains and losses included in earnings in the Level 3 fair value category, including those attributable to the change in unrealized gains and losses relating to assets still held at the reporting date, were classified in electric fuel and other energy-related purchases expense in Virginia Power's Consolidated Statements of Income for the years ended December 31, 2011, 2010 and 2009. There were no unrealized gains and losses included in earnings in the Level 3 fair value category relating to assets/liabilities still held at the reporting date for the years ended 2011, 2010 and 2009.

Fair Value of Financial Instruments

Substantially all of Dominion's and Virginia Power's financial instruments are recorded at fair value, with the exception of the instruments described below that are reported at historical cost. Estimated fair values have been determined using available market information and valuation methodologies considered appropriate by management. The carrying amount of cash and cash equivalents, customer and other receivables, short-term debt and accounts payable are representative of fair value because of the short-term nature of these instruments. For Dominion's and Virginia Power's financial instruments that are not recorded at fair value, the carrying amounts and fair values are as follows:



At December 31,	2011				2010
	Carrying Amount		Estimated Fair Value⁽¹⁾		Carrying Amount		Estimated Fair Value⁽¹⁾
(millions)
Dominion
Long-term debt, including securities due within one year⁽²⁾	$	16,264	$	18,936	$	14,520	$	16,112
Long-term debt - VIE⁽³⁾	890		892		—		—
Junior subordinated notes payable to affiliates	268		268		268		261
Enhanced junior subordinated notes	1,451		1,518		1,467		1,560
Subsidiary preferred stock⁽⁴⁾	257		256		257		249

Virginia Power
Long-term debt, including securities due within one year⁽²⁾	$	6,862	$	8,281	$	6,717	$	7,489
Preferred stock⁽⁴⁾	257		256		257		249


(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. 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)	Includes amounts which represent the unamortized discount and premium. At December 31, 2011, and 2010, includes the valuation of certain fair value hedges associated with Dominion's fixed rate debt, of approximately $105 million and $49 million, respectively.


(3)	Includes amounts which represent the unamortized premium.


(4)	Includes issuance expenses of $2 million at December 31, 2011 and 2010.