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 the Companies' 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 applies fair value measurements to certain assets and liabilities including commodity, interest rate, and foreign currency derivative instruments, and other investments including those held in nuclear decommissioning, Dominion’s rabbi, pension and other postretirement benefit plan trusts, in accordance with the requirements discussed above. Virginia Power applies fair value measurements to certain assets and liabilities including commodity and interest rate derivative instruments and other investments including those held in the nuclear decommissioning trust, in accordance with the requirements discussed above. Dominion Gas applies fair value measurements to certain assets and liabilities including commodity, interest rate, and foreign currency derivative instruments and investments held in 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.

Inputs and Assumptions

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, price information is sought from external sources, including broker quotes and industry publications. When evaluating pricing information provided by brokers and other pricing services, the Companies 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 the Companies 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.

The Companies' commodity derivative valuations are prepared by Dominion's ERM department. The ERM department creates daily mark-to-market valuations for the Companies' derivative transactions using computer-based statistical models. The inputs that go into the 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.

For options and contracts with option-like characteristics where observable pricing information is not available from external sources, Dominion and Virginia Power 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. Dominion and Virginia Power 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 derivative contracts:


•	Forward commodity prices


•	Transaction prices


•	Price volatility


•	Price correlation


•	Volumes


•	Commodity location


•	Interest rates


•	Credit quality of counterparties and the Companies


•	Credit enhancements


•	Time value

For interest rate derivative contracts:


•	Interest rate curves


•	Credit quality of counterparties and the Companies


•	Notional value


•	Credit enhancements


•	Time value

For foreign currency derivative contracts:


•	Foreign currency forward exchange rates


•	Interest rates


•	Credit quality of counterparties and the Companies


•	Notional value


•	Credit enhancements


•	Time value

For investments:


•	Quoted securities prices and indices


•	Securities trading information including volume and restrictions


•	Maturity


•	Interest rates


•	Credit quality

The Companies 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.

Levels

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 certain exchange-traded derivatives, and exchange-listed equities, U.S. and international equity securities, mutual funds and certain Treasury securities held in nuclear decommissioning trust funds for Dominion and Virginia Power, benefit plan trust funds for Dominion and Dominion Gas, and rabbi 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 commodity forwards and swaps, interest rate swaps, foreign currency swaps and cash and cash equivalents, corporate debt instruments, government securities and other fixed income investments held in nuclear decommissioning trust funds for Dominion and Virginia Power, benefit plan trust funds for Dominion and Dominion Gas and rabbi 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 the Companies consist of long-dated commodity derivatives, FTRs, certain natural gas and power options and other modeled commodity derivatives.

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. Alternative investments, consisting of investments in partnerships, joint ventures and other alternative investments held in nuclear decommissioning and benefit plan trust funds, 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. Alternative investments recorded at NAV are not classified in the fair value hierarchy.

For derivative contracts, the Companies 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.

Level 3 Valuations

Fair value measurements are categorized as Level 3 when price or other inputs that are considered to be unobservable are significant to 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. 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.

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 December 31, 2016. The range and weighted average are presented in dollars for market price inputs and percentages for price volatility and credit spreads.



	Fair Value (millions)		Valuation Techniques	Unobservable Input		Range	Weighted Average ⁽¹⁾
Assets:
Physical and Financial Forwards and Futures:
Natural Gas⁽²⁾	$	70	Discounted Cash Flow	Market Price (per Dth)	⁽⁴⁾	(2) - 12	—
				Credit Spreads	⁽⁵⁾	1% - 4%	2	%
FTRs	7		Discounted Cash Flow	Market Price (per MWh)	⁽⁴⁾	(9) - 7	1
Physical and Financial Options:
Natural Gas	3		Option Model	Market Price (per Dth)	⁽⁴⁾	2 - 7	3
				Price Volatility	⁽⁶⁾	18% - 50%	24	%
Electricity	67		Option Model	Market Price (per MWh)	⁽⁴⁾	21 - 55	34
				Price Volatility	⁽⁶⁾	14% - 104%	31	%
Total assets	$	147
Liabilities:
Physical and Financial Forwards and Futures:
Natural Gas⁽²⁾	$	2	Discounted Cash Flow	Market Price (per Dth)	⁽⁴⁾	(2) - 4	4
Liquids⁽³⁾	3		Discounted Cash Flow	Market Price (per Gal)	⁽⁴⁾	0 - 2	1
FTRs	3		Discounted Cash Flow	Market Price (per MWh)	⁽⁴⁾	(9) - 3	—
Total liabilities	$	8


(1)	Averages weighted by volume.


(2)	Includes basis.


(3)	Includes NGLs and oil.


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


(5)	Represents credit spreads unrepresented in published markets.


(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)
Credit Spread	Asset	Increase (decrease)	Loss (gain)

Nonrecurring Fair Value Measurements

Dominion Gas

Natural Gas Assets

In the fourth quarter of 2014, Dominion Gas recorded an impairment charge of $9 million ($6 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 a development project.

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 and Dominion Gas' pension and other postretirement benefit plans are presented in Note 21.

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, 2016
Assets:
Derivatives:
Commodity	$	—	$	115	$	147	$	262
Interest rate	—		17		—		17
Investments⁽¹⁾:
Equity securities:
U.S.	2,913		—		—		2,913
Fixed Income:
Corporate debt instruments	—		487		—		487
Government securities	424		614		—		1,038
Cash equivalents and other	5		—		—		5
Total assets	$	3,342	$	1,233	$	147	$	4,722
Liabilities:
Derivatives:
Commodity	$	—	$	88	$	8	$	96
Interest rate	—		53		—		53
Foreign currency	—		6		—		6
Total liabilities	$	—	$	147	$	8	$	155
At December 31, 2015
Assets:
Derivatives:
Commodity	$	1	$	249	$	114	$	364
Interest rate	—		24		—		24
Investments⁽¹⁾:
Equity securities:
U.S.	2,625		—		—		2,625
Fixed Income:
Corporate debt instruments	—		439		—		439
Government securities	458		574		—		1,032
Cash equivalents and other	2		2		—		4
Total assets	$	3,086	$	1,288	$	114	$	4,488
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. Excludes $89 million and $101 million of assets at December 31, 2016 and 2015, respectively, measured at fair value using NAV (or its equivalent) as a practical expedient which are not required to be categorized in the fair value hierarchy.

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:



	2016			2015			2014
(millions)
Balance at January 1,	$	95		$	107		$	(16	)
Total realized and unrealized gains (losses):
Included in earnings	(35		)	(5		)	97
Included in other comprehensive income (loss)	—			(9		)	7
Included in regulatory assets/liabilities	(39		)	(4		)	109
Settlements	38			9			(88		)
Purchases	87			—			—
Transfers out of Level 3	(7		)	(3		)	(2		)
Balance at December 31,	$	139		$	95		$	107
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	)	$	2		$	6

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			Purchased Gas			Total
(millions)
Year Ended December 31, 2016
Total gains (losses) included in earnings	$	—	$	(35	)	$	—		$	(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		)
Year Ended December 31, 2015
Total gains (losses) included in earnings	$	6	$	(11	)	$	—		$	(5	)
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			—			2
Year Ended December 31, 2014
Total gains (losses) included in earnings	$	4	$	97		$	(4	)	$	97
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		1			1			6

Virginia Power

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



	Fair Value (millions)		Valuation Techniques	Unobservable Input		Range	Weighted Average⁽¹⁾
Assets:
Physical and Financial Forwards and Futures:
Natural gas⁽²⁾	$	68	Discounted Cash Flow	Market Price (per Dth)	⁽³⁾	(2) - 7	—
				Credit Spreads	⁽⁴⁾	1% - 4%	2	%
FTRs	7		Discounted Cash Flow	Market Price (per MWh)	⁽³⁾	(9) - 7	1

Physical and Financial Options:
Natural Gas	3		Option Model	Market Price (per Dth)	⁽³⁾	2 - 7	3
				Price Volatility	⁽⁵⁾	18% - 34%	24	%
Electricity	67		Option Model	Market Price (per MWh)	⁽³⁾	21 - 55	34
				Price Volatility	⁽⁵⁾	14% - 104%	31	%
Total assets	$	152
Liabilities:
Physical and Financial Forwards and Futures:
FTRs	$	2	Discounted Cash Flow	Market Price (per MWh)	⁽³⁾	(9) - 3	—
Total liabilities	$	2


(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)

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, 2016
Assets:
Derivatives:
Commodity	$	—	$	43	$	145	$	188
Interest rate	—		6		—		6
Investments⁽¹⁾:
Equity securities:
U.S.	1,302		—		—		1,302
Fixed Income:
Corporate debt instruments	—		277		—		277
Government Securities	136		291		—		427
Total assets	$	1,438	$	617	$	145	$	2,200
Liabilities:
Derivatives:
Commodity	$	—	$	8	$	2	$	10
Interest rate	—		21		—		21
Total liabilities	$	—	$	29	$	2	$	31
At December 31, 2015
Assets:
Derivatives:
Commodity	$	—	$	13	$	101	$	114
Interest rate	—		13		—		13
Investments⁽¹⁾:
Equity securities:
U.S.	1,163		—		—		1,163
Fixed Income:
Corporate debt instruments	—		238		—		238
Government Securities	180		254		—		434
Total assets	$	1,343	$	518	$	101	$	1,962
Liabilities:
Derivatives:
Commodity	$	—	$	19	$	8	$	27
Interest rate	—		59		—		59
Total liabilities	$	—	$	78	$	8	$	86


(1)	Includes investments held in the nuclear decommissioning trust. Excludes $26 million and $34 million of assets at December 31, 2016 and 2015, respectively, measured at fair value using NAV (or its equivalent) as a practical expedient which are not required to be categorized in the fair value hierarchy.

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:



	2016			2015			2014
(millions)
Balance at January 1,	$	93		$	102		$	(7	)
Total realized and unrealized gains (losses):
Included in earnings	(35		)	(13		)	96
Included in regulatory assets/liabilities	(37		)	(5		)	109
Settlements	35			13			(96		)
Purchases	87			—			—
Transfers out of Level 3	—			(4		)	—
Balance at December 31,	$	143		$	93		$	102

The gains and losses included in earnings in the Level 3 fair value category 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, 2016, 2015 and 2014. 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 December 31, 2016, 2015 and 2014.

Dominion Gas

The following table presents Dominion Gas' quantitative information about Level 3 fair value measurements at December 31, 2016. The range and weighted average are presented in dollars for market price inputs.



	Fair Value (millions)		Valuation Techniques	Unobservable Input		Range	Weighted Average⁽¹⁾
Liabilities:
Physical and Financial Forwards and Futures:
NGLs	$	2	Discounted Cash Flow	Market Price (per Gal)	⁽²⁾	0 - 2	1
Total liabilities	$	2


(1)	Averages weighted by volume.


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

The following table presents Dominion Gas' assets and liabilities for commodity, interest rate, and foreign currency 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 December 31, 2016
Liabilities:
Commodity	$	—	$	3	$	2	5
Foreign currency	—		6		—		6
Total liabilities	$	—	$	9	$	2	$	11
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' derivative assets and liabilities measured at fair value on a recurring basis and included in the Level 3 fair value category:



	2016			2015			2014
(millions)
Balance at January 1,	$	6		$	2		$	(6	)
Total realized and unrealized gains (losses):
Included in earnings	—			1			2
Included in other comprehensive income (loss)	—			(5		)	10
Settlements	—			(1		)	(4		)
Transfers out of Level 3	(8		)	9			—
Balance at December 31,	$	(2	)	$	6		$	2

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 years ended December 31, 2016, 2015 and 2014. 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 December 31, 2016, 2015 and 2014.

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, affiliated 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:



At December 31,	2016				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⁾	$	26,587	$	28,273	$	21,873	$	23,210
Junior subordinated notes⁽³⁾	2,980		2,893		1,340		1,192
Remarketable subordinated notes⁽³⁾	2,373		2,418		2,080		2,129
Virginia Power
Long-term debt, including securities due within one year⁽³⁾	$	10,530	$	11,584	$	9,368	$	10,400
Dominion Gas
Long-term debt, including securities due within one year⁽⁴⁾	$	3,528	$	3,603	$	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 or premium, and foreign currency remeasurement adjustments. At December 31, 2016, and 2015, includes the valuation of certain fair value hedges associated with Dominion's fixed rate debt of $(1) million and $7 million, respectively.


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


(4)	Carrying amount includes amounts which represent the unamortized debt issuance costs, discount or premium, and foreign currency remeasurement adjustments.