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 Dominion's and Virginia Power's Annual Report on Form 10-K for the year ended December 31, 2013 and Note 6 in Exhibit 99.11(b) to Dominion Gas' Current Report on Form 8-K dated June 26, 2014. See Note 9 in this report for further information about their 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 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, 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, 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 the Companies' quantitative information about Level 3 fair value measurements at June 30, 2014. 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⁾	$	19	Discounted Cash Flow	Market Price (per Dth)	⁽⁵⁾	(2) - 5	2
FTRs⁽³⁾	10		Discounted Cash Flow	Market Price (per MWh)	⁽⁵⁾	(1) - 10	1
NGLs ⁽⁴⁾	3		Discounted Cash Flow	Market Price (per Gal)	⁽⁵⁾	1 - 3	1
Physical and Financial Options:
Natural Gas	4		Option Model	Market Price (per Dth)	⁽⁵⁾	3 - 5	4
				Price Volatility	⁽⁶⁾	14% - 32%	24	%
Total assets	$	36
Liabilities:
Physical and Financial Forwards and Futures:
Natural Gas⁽²⁾	$	20	Discounted Cash Flow	Market Price (per Dth)	⁽⁵⁾	(2) - 5	2
FTRs⁽³⁾	3		Discounted Cash Flow	Market Price (per MWh)	⁽⁵⁾	(10) - 10	1
NGLs⁽⁴⁾	6		Discounted Cash Flow	Market Price (per Gal)	⁽⁵⁾	1 - 3	1
Physical and Financial Options:
Natural Gas	4		Option Model	Market Price (per Dth)	⁽⁵⁾	2 - 5	4
				Price Volatility	⁽⁶⁾	14% - 32%	25	%
Total liabilities	$	33


(1)	Averages weighted by volume.


(2)	Includes basis.


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


(4)	Information represents Dominion Gas' quantitative information about Level 3 fair value measurements.


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


(6)	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)

Non-recurring Fair Value Measurements

Dominion

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

Dominion Gas

In June 2013, Dominion Gas 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 Gas 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 Gas 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.

Also in June 2013, Dominion Gas recorded an impairment charge of $6 million ($4 million after-tax) in other operations and

maintenance expense in its Consolidated Statements of Income, to write off previously capitalized costs following the cancellation of two development projects.

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 June 30, 2014
Assets:
Derivatives:
Commodity	$	1	$	645	$	36	$	682
Interest rate	—		57		—		57
Investments⁽¹⁾:
Equity securities:
U.S.:
Large cap	2,592		—		—		2,592
Other	6		—		—		6
Non-U.S.:
Large cap	12		—		—		12
Fixed income:
Corporate debt instruments	—		409		—		409
U.S. Treasury securities and agency debentures	446		182		—		628
State and municipal	—		368		—		368
Other	—		7		—		7
Cash equivalents and other	1		91		—		92
Total assets	$	3,058	$	1,759	$	36	$	4,853
Liabilities:
Derivatives:
Commodity	$	1	$	1,113	$	33	$	1,147
Interest rate	—		109		—		109
Total liabilities	$	1	$	1,222	$	33	$	1,256
At December 31, 2013
Assets:
Derivatives:
Commodity	$	3	$	718	$	32	$	753
Interest rate	—		137		—		137
Investments⁽¹⁾:
Equity securities:
U.S.:
Large cap	2,417		—		—		2,417
Other	79		—		—		79
Non-U.S.:
Large cap	13		—		—		13
Fixed income:
Corporate debt instruments	—		345		—		345
U.S. Treasury securities and agency debentures	415		175		—		590
State and municipal	—		343		—		343
Other	—		3		—		3
Cash equivalents and other	—		103		—		103



Restricted cash equivalents	—		8		—		8
Total assets	$	2,927	$	1,832	$	32	$	4,791
Liabilities:
Derivatives:
Commodity	$	3	$	1,051	$	48	$	1,102
Total liabilities	$	3	$	1,051	$	48	$	1,102


(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 June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
(millions)
Beginning balance	$	8		$	9		$	(16	)	$	25
Total realized and unrealized gains (losses):
Included in earnings	(10		)	(10		)	100			2
Included in other comprehensive income (loss)	(1		)	26			3			36
Included in regulatory assets/liabilities	(3		)	(22		)	14			(27		)
Settlements	9			(1		)	(99		)	(26		)
Transfers out of Level 3	—			—			1			(8		)
Ending balance	$	3		$	2		$	3		$	2
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	$	—		$	(4	)	$	1		$	(11	)

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



	Operating revenue			Purchased Gas			Electric fuel and other energy-related purchases			Total
(millions)
Three Months Ended June 30, 2014
Total gains (losses) included in earnings	$	(1	)	$	(1	)	$	(8	)	$	(10	)
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 June 30, 2013
Total gains (losses) included in earnings	$	(2	)	$	—		$	(8	)	$	(10	)
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		)	(4		)
Six Months Ended June 30, 2014
Total gains (losses) included in earnings	$	(11	)	$	(1	)	$	112		$	100
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			(1		)	—			1
Six Months Ended June 30, 2013
Total gains (losses) included in earnings	$	7		$	—		$	(5	)	$	2
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	(10		)	—			(1		)	(11		)

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 June 30, 2014
Assets:
Derivatives:
Commodity	$	—	$	5	$	10	$	15
Investments⁽¹⁾:
Equity securities:
U.S. Large cap	1,098		—		—		1,098
Fixed income:
Corporate debt instruments	—		221		—		221
U.S. Treasury securities and agency debentures	169		59		—		228
State and municipal	—		185		—		185
Cash equivalents and other	—		28		—		28
Total assets	$	1,267	$	498	$	10	$	1,775
Liabilities:
Derivatives:
Commodity	$	—	$	5	$	3	$	8
Interest rate	—		15		—		15
Total liabilities	$	—	$	20	$	3	$	23
At December 31, 2013
Assets:
Derivatives:
Commodity	$	—	$	3	$	2	$	5
Interest rate	—		48		—		48
Investments⁽¹⁾:
Equity securities:
U.S.:
Large cap	1,021		—		—		1,021
Other	36		—		—		36
Fixed income:
Corporate debt instruments	—		191		—		191
U.S. Treasury securities and agency debentures	146		66		—		212
State and municipal	—		164		—		164
Cash equivalents and other	—		31		—		31
Restricted cash equivalents	—		8		—		8
Total assets	$	1,203	$	511	$	2	$	1,716
Liabilities:
Derivatives:
Commodity	$	—	$	3	$	9	$	12
Total liabilities	$	—	$	3	$	9	$	12


(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 June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
(millions)
Beginning balance	$	10		$	(3	)	$	(7	)	$	2
Total realized and unrealized gains (losses):
Included in earnings	(9		)	(7		)	111			(4		)
Included in regulatory assets/liabilities	(3		)	(22		)	14			(27		)
Settlements	9			7			(111		)	4
Ending balance	$	7		$	(25	)	$	7		$	(25	)

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 six months ended June 30, 2014 and 2013. 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 six months ended June 30, 2014 and 2013.

Dominion Gas

The following table presents Dominion Gas' assets and liabilities for commodity and interest rate 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 June 30, 2014
Assets:
Commodity	$	—	$	—	$	3	$	3
Liabilities:
Commodity	$	—	$	7	$	6	$	13
Interest rate	—		19		—		19
Total liabilities	$	—	$	26	$	6	$	32
At December 31, 2013
Assets:
Commodity	$	—	$	—	$	6	$	6
Interest rate	—		34		—		34
Total Assets	$	—	$	34	$	6	$	40
Liabilities:
Commodity	$	—	$	13	$	12	$	25

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 June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
(millions)
Beginning balance	$	(2	)	$	(1	)	$	(6	)	$	(12	)
Total realized and unrealized gains (losses):
Included in earnings	(2		)	3			(7		)	2
Included in other comprehensive income (loss)	(1		)	24			3			35
Settlements	2			(3		)	7			(2		)
Ending balance	$	(3	)	$	23		$	(3	)	$	23

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 three and six months ended June 30, 2014 and 2013. 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 six months ended June 30, 2014 and 2013.

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 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:



	June 30, 2014				December 31, 2013
	Carrying Amount		Estimated Fair Value⁽¹⁾		Carrying Amount		Estimated Fair Value⁽¹⁾
(millions)
Dominion
Long-term debt, including securities due within one year⁽²⁾	$	18,883	$	21,103	$	18,396	$	19,887
Junior subordinated notes⁽³⁾	1,373		1,392		1,373		1,394
Remarketable subordinated notes⁽³⁾	1,082		1,272		1,080		1,192
Subsidiary preferred stock⁽⁴⁾	134		141		257		261
Virginia Power
Long-term debt, including securities due within one year⁽³⁾	$	8,730	$	9,970	$	8,032	$	8,897
Preferred stock⁽⁴⁾	134		141		257		261
Dominion Gas
Long-term debt⁽³⁾	$	1,199	$	1,236	$	1,198	$	1,169


(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/or premium. At June 30, 2014 and December 31, 2013, includes the valuation of certain fair value hedges associated with fixed rate debt of approximately $54 million and $55 million, respectively.


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


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