Note 8. 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, 2016. 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, futures, and swaps contracts. An option model is used to value Level 3 physical and financial options. The discounted cash flow model for forwards, futures, and swaps 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 Dominion Energy's quantitative information about Level 3 fair value measurements at September 30, 2017. 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⁾	$	91	Discounted cash flow	Market price (per Dth)	⁽³⁾	(2) - 7		—
FTRs		19	Discounted cash flow	Market price (per MWh)	⁽³⁾	(3) - 7		1
Physical options:
Natural gas		2	Option model	Market price (per Dth)	⁽³⁾	2 - 7		4
				Price volatility	⁽⁴⁾	24% - 46%		32	%
Electricity		42	Option model	Market price (per MWh)	⁽³⁾	21 - 50		34
				Price volatility	⁽⁴⁾	0% - 78%		28	%
Total assets	$	154
Liabilities
Financial forwards:
FTRs	$	1	Discounted cash flow	Market price (per MWh)	⁽³⁾	(5) - 7		1
Total liabilities	$	1

(1)	Averages weighted by volume.

(2)	Includes basis.

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

(4)	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)

Recurring Fair Value Measurements

Dominion Energy

The following table presents Dominion Energy’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)
September 30, 2017
Assets
Derivatives:
Commodity	$	—	$	59	$	154	$	213
Interest rate		—		11		—		11
Foreign currency		—		25		—		25
Investments⁽¹⁾:
Equity securities:
U.S.		3,288		—		—		3,288
Fixed income:
Corporate debt instruments		—		452		—		452
Government securities		475		631		—		1,106
Cash equivalents and other		7		—		—		7
Total assets	$	3,770	$	1,178	$	154	$	5,102
Liabilities
Derivatives:
Commodity	$	—	$	41	$	1	$	42
Interest rate		—		72		—		72
Foreign currency		—		4		—		4
Total liabilities	$	—	$	117	$	1	$	118
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

(1)

Includes investments held in the nuclear decommissioning and rabbi trusts. Excludes $92 million and $89 million of assets at September 30, 2017 and December 31, 2016, 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 Energy'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,
	2017			2016			2017			2016
(millions)
Beginning balance	$	152		$	124		$	139		$	95
Total realized and unrealized gains (losses):
Included in earnings		(11	)		(7	)		(36	)		(23	)
Included in other comprehensive income		—			—			—			2
Included in regulatory assets/liabilities		11			(37	)		34			(5	)
Settlements		1			9			13			27
Transfers out of Level 3		—			—			3			(7	)
Ending balance	$	153		$	89		$	153		$	89
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		$	—

The following table presents Dominion Energy’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, 2017
Total gains (losses) included in earnings	$	1	$	(12	)	$	(11	)
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 September 30, 2016
Total gains (losses) included in earnings	$	—	$	(7	)	$	(7	)
Nine Months Ended September 30, 2017
Total gains (losses) included in earnings	$	1	$	(37	)	$	(36	)
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
Nine Months Ended September 30, 2016
Total gains (losses) included in earnings	$	—	$	(23	)	$	(23	)

Virginia Power

The following table presents Virginia Power's quantitative information about Level 3 fair value measurements at September 30, 2017. 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⁾	$	91	Discounted cash flow	Market price (per Dth)	⁽³⁾	(2) - 7		(1	)
FTRs		19	Discounted cash flow	Market price (per MWh)	⁽³⁾	(1) - 7		1
Physical options:
Natural gas		1	Option model	Market price (per Dth)	⁽³⁾	2 - 7		4
				Price volatility	⁽⁴⁾	24% - 46%		32	%
Electricity		42	Option model	Market price (per MWh)	⁽³⁾	21 - 50		34
				Price volatility	⁽⁴⁾	0% - 78%		28	%
Total assets	$	153
Liabilities
Financial forwards:
FTRs	$	1	Discounted cash flow	Market price (per MWh)	⁽³⁾	(5) - 7		1
Total liabilities	$	1

(1)	Averages weighted by volume.

(2)	Includes basis.

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

(4)	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)

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)
September 30, 2017
Assets
Derivatives:
Commodity	$	—	$	15	$	153	$	168
Investments⁽¹⁾:
Equity securities:
U.S.		1,471		—		—		1,471
Fixed income:
Corporate debt instruments		—		234		—		234
Government securities		193		302		—		495
Total assets	$	1,664	$	551	$	153	$	2,368
Liabilities
Derivatives:
Commodity	$	—	$	5	$	1	$	6
Interest rate		—		55		—		55
Total liabilities	$	—	$	60	$	1	$	61
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

(1)

Includes investments held in the nuclear decommissioning trusts. Excludes $29 million and $26 million of assets at September 30, 2017 and December 31, 2016, 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:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
(millions)
Beginning balance	$	152		$	125		$	143		$	93
Total realized and unrealized gains (losses):
Included in earnings		(12	)		(7	)		(37	)		(24	)
Included in regulatory assets/liabilities		11			(37	)		34			(5	)
Settlements		1			7			12			24
Ending balance	$	152		$	88		$	152		$	88

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, 2017 and 2016. 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, 2017 and 2016.

Dominion Energy Gas

The following table presents Dominion Energy 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)
September 30, 2017
Assets
Commodity	$	—	$	1	$	—	$	1
Foreign currency		—		25		—		25
Total assets	$	—	$	26	$	—	$	26
Liabilities
Commodity	$	—	$	6	$	—	$	6
Foreign currency		—		4		—		4
Total liabilities	$	—	$	10	$	—	$	10
December 31, 2016
Liabilities
Commodity	$	—	$	3	$	2	$	5
Foreign currency		—		6		—		6
Total liabilities	$	—	$	9	$	2	$	11

The following table presents the net change in Dominion Energy Gas' assets and liabilities for derivatives measured at fair value on a recurring basis and included in the Level 3 fair value category. There were no net changes in assets and liabilities for derivatives measured at fair value on a recurring basis and included in the Level 3 fair value category for the three months ended September 30, 2017 and 2016.

	Nine Months Ended September 30,
	2017			2016
(millions)
Beginning balance	$	(2	)	$	6
Total realized and unrealized gains (losses):
Included in other comprehensive income (loss)		(1	)		2
Transfers out of Level 3		3			(8	)
Ending balance	$	—		$	—

There were no gains or losses included in earnings in the Level 3 fair value category for the three and nine months ended September 30, 2017 and 2016. 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, 2017 and 2016.

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 Dominion Energy’s 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:

	September 30, 2017				December 31, 2016
	Carrying Amount		Estimated Fair Value⁽¹⁾		Carrying Amount		Estimated Fair Value⁽¹⁾
(millions)
Dominion Energy
Long-term debt, including securities due within one year⁽²⁾	$	28,317	$	30,639	$	26,587	$	28,273
Junior subordinated notes⁽³⁾		3,980		4,128		2,980		2,893
Remarketable subordinated notes⁽³⁾		1,377		1,421		2,373		2,418
Virginia Power
Long-term debt, including securities due within one year⁽³⁾	$	11,346	$	12,686	$	10,530	$	11,584
Dominion Energy Gas
Long-term debt⁽⁴⁾	$	3,564	$	3,705	$	3,528	$	3,603

(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 September 30, 2017 and December 31, 2016, includes the valuation of certain fair value hedges associated with fixed rate debt of $(4) million and $(1) 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.