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, 2015. 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 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, credit spreads 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's quantitative information about Level 3 fair value measurements at March 31, 2016. The range and weighted average are presented in dollars for market price inputs and percentages for credit spreads and price volatility.



	Fair Value (millions)		Valuation Techniques	Unobservable Input		Range	Weighted Average⁽¹⁾
Assets
Physical and financial forwards and futures:
Natural gas⁽²⁾	$	115	Discounted cash flow	Market price (per Dth)	⁽³⁾	(2) - 6	—
				Credit spread	⁽⁴⁾	1% - 7%	3	%
FTRs	4		Discounted cash flow	Market price (per MWh)	⁽³⁾	(5) - 7	1
Physical and financial options:
Natural gas	5		Option model	Market price (per Dth)	⁽³⁾	1 - 6	3
				Price volatility	⁽⁵⁾	18% - 59%	22	%
Total assets	$	124
Liabilities
Physical and financial forwards and futures:
Natural gas⁽²⁾	$	7	Discounted cash flow	Market price (per Dth)	⁽³⁾	(1) - 3	2
FTRs	6		Discounted cash flow	Market price (per MWh)	⁽³⁾	(3) - 5	1
Physical and financial options:
Natural gas	2		Option model	Market price (per Dth)	⁽³⁾	1 - 4	2
				Price volatility	⁽⁵⁾	26% - 59%	38	%
Total liabilities	$	15


(1)	Averages weighted by volume.


(2)	Includes basis.


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


(4)	Represents credit spreads unrepresented in published markets.


(5)	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)
Credit spread	Asset	Increase (decrease)	Loss (gain)

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, 2016
Assets
Derivatives:
Commodity	$	1	$	245	$	124	$	370
Interest rate	—		31		—		31
Investments⁽¹⁾:
Equity securities:
U.S.:
Large cap	2,571		—		—		2,571
Other	5		—		—		5
REIT	67		—		—		67
Non-U.S.:
Large cap	9		—		—		9
Fixed income:
Corporate debt instruments	—		464		—		464
U.S. Treasury securities and agency debentures	451		219		—		670
State and municipal	—		372		—		372
Other	—		99		—		99
Cash equivalents and other	6		1		—		7
Total assets	$	3,110	$	1,431	$	124	$	4,665
Liabilities
Derivatives:
Commodity	$	—	$	124	$	15	$	139
Interest rate	—		291		—		291
Total liabilities	$	—	$	415	$	15	$	430
At December 31, 2015
Assets
Derivatives:
Commodity	$	1	$	249	$	114	$	364
Interest rate	—		24		—		24
Investments⁽¹⁾:
Equity securities:



U.S.:
Large cap	2,547		—		—		2,547
Other	5		—		—		5
REIT	63		—		—		63
Non-U.S.:
Large cap	10		—		—		10
Fixed income:
Corporate debt instruments	—		437		—		437
U.S. Treasury securities and agency debentures	458		201		—		659
State and municipal	—		376		—		376
Other	—		100		—		100
Cash equivalents and other	2		2		—		4
Total assets	$	3,086	$	1,389	$	114	$	4,589
Liabilities
Derivatives:
Commodity	$	—	$	141	$	19	$	160
Interest rate	—		183		—		183
Total liabilities	$	—	$	324	$	19	$	343


(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,
	2016			2015
(millions)
Beginning balance	$	95		$	107
Total realized and unrealized gains (losses):
Included in earnings	(7		)	15
Included in other comprehensive income (loss)	3			(11		)
Included in regulatory assets/liabilities	17			(24		)
Settlements	8			(14		)
Transfers out of Level 3	(7		)	3
Ending balance	$	109		$	76

The following table presents Dominion's classification of gains and losses included in earnings in the Level 3 fair value category. 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 months ended March 31, 2016 and 2015.



	Operating Revenue		Electric Fuel and Other Energy-Related Purchases			Total
(millions)
Three Months Ended March 31, 2016
Total gains (losses) included in earnings	$	—	$	(7	)	$	(7	)
Three Months Ended March 31, 2015
Total gains (losses) included in earnings	2		13			15

Virginia Power

The following table presents Virginia Power's quantitative information about Level 3 fair value measurements at March 31, 2016. The range and weighted average are presented in dollars for market price inputs and percentages for credit spreads and price volatility.



	Fair Value (millions)		Valuation Techniques	Unobservable Input		Range	Weighted Average⁽¹⁾
Assets
Physical and financial forwards and futures:
FTRs	$	4	Discounted cash flow	Market price (per MWh)	⁽³⁾	(5) - 7	1
Natural gas⁽²⁾	111		Discounted cash flow	Market price (per Dth)	⁽³⁾	(2) - 6	—
				Credit spread	⁽⁴⁾	1% - 7%	3	%
Physical and financial options:
Natural gas	1		Option model	Market price (per Dth)	⁽³⁾	2 - 6	3
				Price volatility	⁽⁵⁾	18% - 29%	21	%
Total assets	$	116
Liabilities
Physical and financial forwards and futures:
FTRs	$	6	Discounted cash flow	Market price (per MWh)	⁽³⁾	(3) - 5	1
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 credit spreads unrepresented in published markets.


(5)	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)
Credit spread	Asset	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 March 31, 2016
Assets
Derivatives:
Commodity	$	—	$	14	$	116	$	130
Interest rate	—		8		—		8
Investments⁽¹⁾:
Equity securities:
U.S. large cap	1,113		—		—		1,113
REIT	67		—		—		67
Fixed income:
Corporate debt instruments	—		250		—		250
U.S. Treasury securities and agency debentures	164		99		—		263
State and municipal	—		173		—		173
Other	—		46		—		46
Total assets	$	1,344	$	590	$	116	$	2,050
Liabilities
Derivatives:
Commodity	$	—	$	24	$	6	$	30
Interest rate	—		144		—		144
Total liabilities	$	—	$	168	$	6	$	174
At December 31, 2015
Assets
Derivatives:
Commodity	$	—	$	13	$	101	$	114
Interest rate	—		13		—		13
Investments⁽¹⁾:
Equity securities:
U.S. large cap	1,100		—		—		1,100
REIT	63		—		—		63
Fixed income:
Corporate debt instruments	—		238		—		238
U.S. Treasury securities and agency debentures	180		79		—		259
State and municipal	—		175		—		175
Other	—		34		—		34
Total assets	$	1,343	$	552	$	101	$	1,996
Liabilities
Derivatives:
Commodity	$	—	$	19	$	8	$	27
Interest rate	—		59		—		59
Total liabilities	$	—	$	78	$	8	$	86


(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,
	2016			2015
(millions)
Beginning balance	$	93		$	102
Total realized and unrealized gains (losses):
Included in earnings	(8		)	14
Included in regulatory assets/liabilities	17			(24		)
Settlements	8			(14		)
Ending balance	$	110		$	78

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, 2016 and 2015. 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 months ended March 31, 2016 and 2015.

Dominion Gas

The following table presents Dominion 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 March 31, 2016
Assets
Commodity	$	—	$	6	$	—	$	6
Total Assets	$	—	$	6	$	—	$	6
Liabilities
Interest rate	$	—	$	23	$	—	$	23
Total liabilities	$	—	$	23	$	—	$	23
At December 31, 2015
Assets
Commodity	$	—	$	5	$	6	$	11
Total Assets	$	—	$	5	$	6	$	11
Liabilities
Interest rate	$	—	$	14	$	—	$	14
Total liabilities	$	—	$	14	$	—	$	14

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 March 31,
	2016			2015
(millions)
Beginning balance	$	6		$	2
Total realized and unrealized gains (losses):
Included in earnings	—			1
Included in other comprehensive income (loss)	2			(11		)
Settlements	—			(1		)
Transfers out of Level 3	(8		)	9
Ending balance	$	—		$	—

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 months ended March 31, 2016 and 2015. 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 months ended March 31, 2016 and 2015.

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 (which is recorded in other current assets), 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:



	March 31, 2016				December 31, 2015
	Carrying Amount		Estimated Fair Value⁽¹⁾		Carrying Amount		Estimated Fair Value⁽¹⁾
(millions)
Dominion
Long-term debt, including securities due within one year⁽²⁾	$	22,581	$	24,443	$	21,873	$	23,210
Junior subordinated notes⁽³⁾	1,849		1,696		1,340		1,192
Remarketable subordinated notes⁽³⁾	1,530		1,647		2,080		2,129
Virginia Power
Long-term debt, including securities due within one year⁽³⁾	$	9,663	$	11,020	$	9,368	$	10,400
Dominion Gas
Long-term debt, including securities due within one year⁽³⁾	$	3,271	$	3,375	$	3,269	$	3,299


(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 and/or premium. At March 31, 2016 and December 31, 2015, includes the valuation of certain fair value hedges associated with fixed rate debt of $19 million and $7 million, respectively.


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