Fair Value Measurements

Dominion's and Virginia Power's fair value measurements are made in accordance with the policies discussed in Note 6 to the Consolidated Financial Statements in their Annual Report on Form 10-K for the year ended December 31, 2012. See Note 9 in this report for further information about their derivatives and hedge accounting activities.

Dominion and Virginia Power enter into certain physical and financial forwards and futures, options, and full requirements contracts, 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 full requirements 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. Full requirements contracts add load shaping and usage factors in addition to the discounted cash flow model inputs. 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, mean reversions, 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, forward market prices, implied price volatilities, price correlations, load shaping, and usage factors 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 and Virginia Power's quantitative information about Level 3 fair value measurements. The range and weighted average are presented in dollars for market price inputs, years for mean reversion speeds, and percentages for price volatility, price correlations, load shaping, and usage factors.



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

At September 30, 2013
Assets:
Physical and Financial Forwards and Futures:
Natural Gas⁽²⁾	$	10	Discounted Cash Flow	Market Price (per Dth)	⁽⁴⁾	(1) - 5	2
Electricity	9		Discounted Cash Flow	Market Price (per MWh)	⁽⁴⁾	31 - 77	44
FTRs⁽³⁾	1		Discounted Cash Flow	Market Price (per MWh)	⁽⁴⁾	(1) - 6	0
Liquids	12		Discounted Cash Flow	Market Price (per Gal)	⁽⁴⁾	0 - 3	1
Physical and Financial Options:
Natural Gas	7		Option Model	Market Price (per Dth)	⁽⁴⁾	3 - 5	4
				Price Volatility	⁽⁵⁾	19% - 30%	24	%
				Price Correlation	⁽⁶⁾	(9)% - 100%	36	%
				Mean Reversion	⁽⁷⁾	0 - 58	4
Full Requirements Contracts:
Electricity	13		Discounted Cash Flow	Market Price (per MWh)	⁽⁴⁾	10 - 403⁽¹⁰⁾	34
				Load Shaping	⁽⁸⁾	0% - 10%	7	%
				Usage Factor	⁽⁹⁾	11% - 15%	14	%
Total assets	$	52
Liabilities:
Physical and Financial Forwards and Futures:
Natural Gas⁽²⁾	$	16	Discounted Cash Flow	Market Price (per Dth)	⁽⁴⁾	(1) - 5	1
Electricity	6		Discounted Cash Flow	Market Price (per MWh)	⁽⁴⁾	23 - 86	50
FTRs⁽³⁾	16		Discounted Cash Flow	Market Price (per MWh)	⁽⁴⁾	(4) - 6	1
Liquids	8		Discounted Cash Flow	Market Price (per Gal)	⁽⁴⁾	1 - 3	2
Physical and Financial Options:
Natural Gas	10		Option Model	Market Price (per Dth)	⁽⁴⁾	3 - 10	5
				Price Volatility	⁽⁵⁾	19% - 30%	23	%
				Price Correlation	⁽⁶⁾	(9)% - 100%	36	%
				Mean Reversion	⁽⁷⁾	0 - 58	4
Total liabilities	$	56


(1)	Averages weighted by volume.


(2)	Includes basis.


(3)	Information represents Virginia Power's quantitative information about Level 3 fair value measurements.


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


(5)	Represents volatilities unrepresented in published markets.


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


(7)	Represents mean-reverting property in price simulation modeling.


(8)	Converts block monthly loads to 24-hour load shapes.


(9)	Represents expected increase (decrease) in sales volumes compared to historical usage.


(10)	The range in market prices is the result of large variability in hourly power prices during peak and off-peak hours.

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)
Mean Reversion	Buy	Increase (decrease)	Loss (gain)
Mean Reversion	Sell	Increase (decrease)	Gain (loss)
Load Shaping	Sell⁽¹⁾	Increase (decrease)	Loss (gain)
Usage Factor	Sell⁽²⁾	Increase (decrease)	Gain (loss)


(1)	Assumes the contract is in a gain position and load increases during peak hours.


(2)	Assumes the contract is in a gain position.

Non-recurring Fair Value Measurements

In June 2013, Dominion purchased certain natural gas infrastructure facilities that were previously leased from third parties. The purchase price was based on terms in the lease, which exceeded current market pricing. As a result of the purchase price and expected losses, Dominion recorded an impairment charge of $49 million ($29 million after-tax) in other operations and maintenance expense in its Consolidated Statements of Income, to write down the long-lived assets to their estimated fair values 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 the assets in this impairment test. This was considered a Level 3 fair value measurement due to the use of significant unobservable inputs, including estimates of future production and other commodity prices.

See Note 3 for non-recurring fair value measurements related to Brayton Point and Kincaid.

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, 2013
Assets:
Derivatives:
Commodity	$	6	$	713	$	52	$	771
Interest rate	—		114		—		114
Investments⁽¹⁾:
Equity securities:
U.S.:
Large cap	2,211		—		—		2,211
Other	74		—		—		74
Non-U.S.:
Large cap	11		—		—		11
Fixed income:
Corporate debt instruments	—		352		—		352
U.S. Treasury securities and agency debentures	414		168		—		582
State and municipal	—		342		—		342
Other	—		4		—		4
Cash equivalents and other	9		80		—		89
Restricted cash equivalents	—		10		—		10
Total assets	$	2,725	$	1,783	$	52	$	4,560
Liabilities:
Derivatives:
Commodity	$	5	$	721	$	56	$	782
Interest rate	—		11		—		11
Total liabilities	$	5	$	732	$	56	$	793
At December 31, 2012
Assets:
Derivatives:
Commodity	$	12	$	639	$	84	$	735
Interest rate	—		93		—		93
Investments⁽¹⁾:
Equity securities:
U.S.:
Large cap	1,973		—		—		1,973
Other	59		—		—		59
Non-U.S.:
Large cap	12		—		—		12
Fixed income:
Corporate debt instruments	—		325		—		325
U.S. Treasury securities and agency debentures	391		152		—		543
State and municipal	—		315		—		315
Other	—		7		—		7



Cash equivalents and other	13		67		—		80
Restricted cash equivalents	—		33		—		33
Total assets	$	2,460	$	1,631	$	84	$	4,175
Liabilities:
Derivatives:
Commodity	$	8	$	528	$	59	$	595
Interest rate	—		66		—		66
Total liabilities	$	8	$	594	$	59	$	661


(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,
	2013			2012			2013			2012
(millions)
Beginning balance	$	2		$	155		$	25		$	(71	)
Total realized and unrealized gains (losses):
Included in earnings	(1		)	(8		)	1			(31		)
Included in other comprehensive income (loss)	(25		)	(48		)	11			124
Included in regulatory assets/liabilities	10			2			(17		)	30
Settlements	3			3			(23		)	54
Transfers out of Level 3	7			(1		)	(1		)	(3		)
Ending balance	$	(4	)	$	103		$	(4	)	$	103
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	$	2		$	(15	)	$	—		$	25

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, 2013
Total gains (losses) included in earnings	$	5		$	(6	)	$	(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	2			—			2
Three Months Ended September 30, 2012
Total gains (losses) included in earnings	$	(10	)	$	2		$	(8	)
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	(15		)	—			(15		)
Nine Months Ended September 30, 2013
Total gains (losses) included in earnings	$	12		$	(11	)	$	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	—			—			—
Nine Months Ended September 30, 2012
Total gains (losses) included in earnings	$	13		$	(44	)	$	(31	)
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	25			—			25

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 September 30, 2013
Assets:
Derivatives:
Commodity	$	—	$	1	$	1	$	2
Interest rate	—		33		—		33
Investments⁽¹⁾:
Equity securities:
U.S.:
Large cap	939		—		—		939
Other	33		—		—		33
Fixed income:
Corporate debt instruments	—		197		—		197
U.S. Treasury securities and agency debentures	146		63		—		209
State and municipal	—		160		—		160
Cash equivalents and other	—		24		—		24
Restricted cash equivalents	—		10		—		10
Total assets	$	1,118	$	488	$	1	$	1,607
Liabilities:
Derivatives:
Commodity	$	—	$	4	$	16	$	20
Total liabilities	$	—	$	4	$	16	$	20
At December 31, 2012
Assets:
Derivatives:
Commodity	$	—	$	1	$	5	$	6
Investments⁽¹⁾:
Equity securities:
U.S.:
Large cap	779		—		—		779
Other	27		—		—		27
Fixed income:
Corporate debt instruments	—		196		—		196
U.S. Treasury securities and agency debentures	168		66		—		234
State and municipal	—		118		—		118
Other	—		1		—		1
Cash equivalents and other	7		31		—		38
Restricted cash equivalents	—		10		—		10
Total assets	$	981	$	423	$	5	$	1,409
Liabilities:
Derivatives:
Commodity	$	—	$	6	$	3	$	9
Interest rate	—		25		—		25
Total liabilities	$	—	$	31	$	3	$	34


(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,
	2013			2012			2013			2012
(millions)
Beginning balance	$	(25	)	$	1		$	2		$	(28	)
Total realized and unrealized gains (losses):
Included in earnings	(4		)	2			(9		)	(44		)
Included in regulatory assets/liabilities	10			2			(17		)	31
Settlements	4			(2		)	9			44
Ending balance	$	(15	)	$	3		$	(15	)	$	3

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, 2013 and 2012. 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, 2013 and 2012.

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, 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 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:



	September 30, 2013				December 31, 2012
	Carrying Amount		Estimated Fair Value⁽¹⁾		Carrying Amount		Estimated Fair Value⁽¹⁾
(millions)
Dominion
Long-term debt, including securities due within one year⁽²⁾	$	17,228	$	18,899	$	16,841	$	19,898
Securities due within one year, VIE⁽³⁾	—		—		860		864
Junior subordinated notes⁽³⁾	1,373		1,397		1,373		1,430
Remarketable subordinated notes⁽³⁾	1,079		1,175		—		—
Subsidiary preferred stock⁽⁴⁾	257		258		257		255
Virginia Power
Long-term debt, including securities due within one year⁽²⁾	$	8,039	$	8,975	$	6,669	$	8,270
Preferred stock⁽⁴⁾	257		258		257		255


(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 discount and premium. At September 30, 2013 and December 31, 2012, includes the valuation of certain fair value hedges associated with Dominion’s fixed rate debt of approximately $56 million and $93 million, respectively.


(3)	Carrying amount includes amounts which represent the unamortized discount or premium.


(4)	Carrying amount includes deferred issuance expenses of $2 million at September 30, 2013 and December 31, 2012.