Fair Value Measurements

Dominion's and Virginia Power's fair value measurements are made in accordance with the policies discussed in Note 7 to the Consolidated Financial Statements in their Annual Report on Form 10-K for the year ended December 31, 2011. See Note 7 in this report for further information about their derivatives and hedge accounting activities.

At March 31, 2012, Dominion's and Virginia Power's net balance of commodity derivatives categorized as Level 3 fair value measurements was a net liability of $61 million and $17 million, respectively.

Dominion's and Virginia Power's commodity derivative valuations are prepared by the ERM department. The ERM department reports directly to the Companies' CFO. The ERM department creates a daily computer-generated file containing mark-to-market valuations for the Companies' derivative transactions. Standard transactions are programmatically calculated using software. The inputs that go into the mark-to-market valuations are transactional information stored in the systems of record and market pricing information that resides in data warehouse databases. The majority of forward prices are automatically uploaded into the data warehouse databases from various third party sources. Inputs obtained from third party sources are evaluated for reliability considering the reputation, independence, market presence, and methodology used by the third party. If forward prices are not available from third party sources, then the ERM department models the forward prices based on other available market data. A team consisting of risk management and risk quantitative analysts meets each business day to assess the validity of market prices and mark-to-market valuations. During this meeting, the changes in mark-to-market valuations from period to period are examined and qualified against historical expectations. If any discrepancies are identified during this process, the mark-to-market valuations or the market pricing information is evaluated further and adjusted, if necessary.

Dominion and Virginia Power use the discounted cash flow method to value Level 3 physical and financial forwards and futures and an option model to value Level 3 physical and financial options. The discounted cash flow model 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, price correlations, the original sales prices, and volumes. For Level 3 fair value measurements, the forward market prices, the implied price volatilities, and price correlations 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. Included are descriptions of the valuation techniques, the significant unobservable inputs, and the range of market price, price correlation and price volatility inputs used in the fair value measurements at March 31, 2012 for each category of transaction and commodity type. The range and weighted average are presented in dollars for market price inputs and percentages for price volatility and correlations.



	Fair Value (millions)		Valuation Technique(s)	Unobservable Input		Range	Weighted Average⁽¹⁾

At March 31, 2012
Assets:
Physical and Financial Forwards and Futures:
Natural Gas⁽²⁾	$	31	Discounted Cash Flow	Market Price (per Dth)	⁽³⁾	(1) - 6	3
Electricity	69		Discounted Cash Flow	Market Price (per MWh)	⁽³⁾	21 - 61	43
FTRs	1		Discounted Cash Flow	Market Price (per MWh)	⁽³⁾	(3) - 3	—
Capacity	9		Discounted Cash Flow	Market Price (per MW)	⁽³⁾	95-120	101
Liquids	1		Discounted Cash Flow	Market Price (per Gal)	⁽³⁾	1 - 2	1
Physical and Financial Options:
Natural Gas	6		Option Model	Market Price (per Dth)	⁽³⁾	2 - 5	4
				Price Volatility	⁽⁴⁾	23% - 60%	30	%
				Price Correlation	⁽⁵⁾	100% - 100%	100	%
Total assets	$	117
Liabilities:
Physical and Financial Forwards and Futures:
Natural Gas⁽²⁾	$	21	Discounted Cash Flow	Market Price (per Dth)	⁽³⁾	(1) - 6	3
Electricity	17		Discounted Cash Flow	Market Price (per MWh)	⁽³⁾	12 - 61	41
FTRs	18		Discounted Cash Flow	Market Price (per MWh)	⁽³⁾	(6) - 5	—
Liquids	108		Discounted Cash Flow	Market Price (per Gal)	⁽³⁾	1 - 3	2
Physical and Financial Options:
Natural Gas⁽²⁾	14		Option Model	Market Price (per Dth)	⁽³⁾	(1) - 5	2
				Price Volatility	⁽⁴⁾	23% - 59%	36	%
				Price Correlation	⁽⁵⁾	70% - 100%	90	%
Total liabilities	$	178


(1)	Averages weighted by volume.


(2)	Includes basis.


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


(4)	Represents volatilities unrepresented in published markets.


(5)	Represents intra-price correlations for which markets do not exist.

The following table presents Virginia Power's quantitative information about Level 3 fair value measurements. Included are descriptions of the valuation techniques, the significant unobservable inputs, and the range of market price inputs used in the fair value measurements at March 31, 2012 for each category of transaction and commodity type. The range and weighted average are presented in dollars for market price inputs.



	Fair Value (millions)		Valuation Technique(s)	Unobservable Input		Range	Weighted Average⁽¹⁾

At March 31, 2012
Assets:
Physical and Financial Forwards and Futures:
FTRs	$	1	Discounted Cash Flow	Market Price (per MWh)	⁽²⁾	(3) - 3	0
Total assets	$	1
Liabilities:
Physical and Financial Forwards and Futures:
FTRs	$	18	Discounted Cash Flow	Market Price (per MWh)	⁽²⁾	(6) - 3	0
Total liabilities	$	18


(1)	Averages weighted by volume.


(2)	Represents market prices beyond defined terms for Levels 1 & 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)
Price Volatility	Buy	Increase (decrease)	Gain (loss)
Price Volatility	Sell	Increase (decrease)	Loss (gain)
Price Correlation	Buy	Increase (decrease)	Loss (gain)
Price Correlation	Sell	Increase (decrease)	Gain (loss)

Non-recurring Fair Value Measurements

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. 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 long-lived assets in the impairment test. This was considered a Level 3 fair value measurement due to the use of significant unobservable inputs including estimates of future power and other commodity prices. State Line was retired in March 2012.

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 March 31, 2012
Assets:
Derivatives:
Commodity	$	54	$	1,007	$	117	$	1,178
Interest rate	—		94		—		94
Investments⁽¹⁾:
Equity securities:
U.S.:
Large cap	1,933		—		—		1,933
Other	59		—		—		59
Non-U.S.:
Large cap	11		—		—		11
Fixed income:
Corporate debt instruments	—		317		—		317
U.S. Treasury securities and agency debentures	308		170		—		478
State and municipal	—		328		—		328
Other	—		20		—		20
Cash equivalents and other	—		82		—		82
Restricted cash equivalents	—		104		—		104
Total assets	$	2,365	$	2,122	$	117	$	4,604
Liabilities:
Derivatives:
Commodity	$	19	$	737	$	178	$	934
Interest rate	—		176		—		176
Total liabilities	$	19	$	913	$	178	$	1,110
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


(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 March 31,
	2012			2011
(millions)
Beginning balance	$	(71	)	$	(50	)
Total realized and unrealized gains (losses):
Included in earnings	(35		)	14
Included in other comprehensive income (loss)	5			(94		)
Included in regulatory assets/liabilities	11			(21		)
Settlements	30			(16		)
Transfers out of Level 3	(1		)	4
Ending balance	$	(61	)	$	(163	)
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		$	4

The following table presents Dominion's 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 March 31, 2012
Total gains (losses) included in earnings	$	(9	)	$	(26	)	$	(35	)
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 March 31, 2011
Total gains (losses) included in earnings	$	(2	)	$	16		$	14
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			—			4

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 March 31, 2012
Assets:
Derivatives:
Commodity	$	—	$	—	$	1	$	1
Investments⁽¹⁾:
Equity securities:
U.S.:
Large cap	764		—		—		764
Other	27		—		—		27
Fixed income:
Corporate debt instruments	—		197		—		197
U.S. Treasury securities and agency debentures	123		65		—		188
State and municipal	—		129		—		129
Other	—		13		—		13
Cash equivalents and other	—		41		—		41
Restricted cash equivalents	—		29		—		29
Total assets	$	914	$	474	$	1	$	1,389
Liabilities:
Derivatives:
Commodity	$	—	$	21	$	18	$	39
Interest rate	—		38		—		38
Total liabilities	$	—	$	59	$	18	$	77
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


(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 March 31,
	2012			2011
(millions)
Beginning balance	$	(28	)	$	14
Total realized and unrealized gains (losses):
Included in earnings	(27		)	16
Included in regulatory assets/liabilities	11			(21		)
Settlements	27			(16		)
Ending balance	$	(17	)	$	(7	)

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 months ended March 31, 2012 and 2011. 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 three months ended March 31, 2012 and 2011.

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 estimated fair values are as follows:



	March 31, 2012				December 31, 2011
	Carrying Amount		Estimated Fair Value⁽¹⁾		Carrying Amount			Estimated Fair Value⁽¹⁾
(millions)
Dominion
Long-term debt, including securities due within one year⁽²⁾	$	16,695	$	19,256	$	16,264	18,936	$	18,936
Long-term debt, VIE⁽³⁾	882		889		890		892	892
Junior subordinated notes payable to affiliates	268		272		268		268	268
Enhanced junior subordinated notes	1,365		1,437		1,451		1,518	1,518
Subsidiary preferred stock⁽⁴⁾	257		259		257		256	256
Virginia Power
Long-term debt, including securities due within one year⁽²⁾	$	7,308	$	8,628	$	6,862		$	8,281
Preferred stock⁽⁴⁾	257		259		257			256


(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)	Includes amounts which represent the unamortized discount and premium. At March 31, 2012 and December 31, 2011, includes the valuation of certain fair value hedges associated with Dominion’s fixed rate debt of approximately $93 million and $105 million, respectively.


(3)	Includes amounts which represent the unamortized premium.


(4)	Includes deferred issuance expenses of $2 million at March 31, 2012 and December 31, 2011.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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