NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Description
of Business and Basis of Presentation
Description of Business
Dominion Midstream is a Delaware limited partnership formed in March 2014 by Dominion MLP Holding Company, LLC and Dominion Midstream GP, LLC, both indirect
wholly-owned subsidiaries of Dominion, to grow a portfolio of natural gas terminaling, processing, storage, transportation and related assets.
Dominion
Midstream acquired from Dominion the Preferred Equity Interest and non-economic general partner interest in Cove Point, the owner and operator of the Cove Point LNG Facility and the Cove Point Pipeline. The Preferred Equity Interest is a
perpetual, non-convertible preferred equity interest entitled to Preferred Return Distributions so long as Cove Point has sufficient cash and undistributed Net Operating Income (determined on a cumulative basis from the closing of the Offering) from
which to make Preferred Return Distributions. Preferred Return Distributions are made on a quarterly basis and are not cumulative. The Preferred Equity Interest is also entitled to the Additional Return Distributions.
On April 1, 2015, Dominion Midstream acquired from Dominion all issued and outstanding membership interests in DCG as described further in Note 2. DCG
owns and operates nearly 1,500 miles of FERC-regulated open access, transportation-only interstate natural gas pipeline in South Carolina and southeastern Georgia.
On September 29, 2015, Dominion Midstream acquired a 25.93% noncontrolling partnership interest in Iroquois as described further in Note 7. Iroquois, a
Delaware limited partnership, owns and operates a 416-mile FERC-regulated interstate natural gas transmission pipeline that extends from the Canada-U.S. border through the states of New York and Connecticut.
Basis of Presentation
The contribution by Dominion to
Dominion Midstream of the general partner interest in Cove Point and a portion of the Preferred Equity Interest is considered to be a reorganization of entities under common control. As a result, Dominion Midstreams basis is equal to
Dominions cost basis in the general partner interest in Cove Point and a portion of the Preferred Equity Interest. As discussed in Note 10, Dominion Midstream is the primary beneficiary of, and therefore consolidates, Cove Point. As such,
Dominion Midstreams investment in the Preferred Equity Interest and Cove Points preferred equity interest are eliminated in consolidation. Dominions retained common equity interest in Cove Point is reflected as noncontrolling
interest.
The DCG Acquisition is considered to be a reorganization of entities under common control. As a result, Dominion Midstreams basis in DCG
is equal to Dominions cost basis in the assets and liabilities of DCG. On April 1, 2015, DCG became a wholly-owned subsidiary of Dominion Midstream and is therefore consolidated by Dominion Midstream. The accompanying financial statements and
related notes have been retrospectively adjusted to include the historical results and financial position of DCG beginning January 31, 2015, the inception date of common control.
The financial statements for all periods presented include costs for certain general, administrative and corporate expenses assigned by DRS or DCGS (Dominion
Payroll prior to January 1, 2016) to Dominion Midstream on the basis of direct and allocated methods in accordance with Dominion Midstreams services agreements with DRS and DCGS (Dominion Payroll prior to January 1, 2016). Where costs
incurred cannot be determined by specific identification, the costs are allocated based on the proportional level of effort devoted by DRS or DCGS (Dominion Payroll prior to January 1, 2016) resources that is attributable to the entities, determined
by reference to number of employees, salaries and wages and other similar measures for the relevant DRS or DCGS (Dominion Payroll prior to January 1, 2016) department. Management believes the assumptions and methodologies underlying the
allocation of general corporate overhead expenses are reasonable.
10
Note 2. Acquisitions
DCG
On April 1, 2015, Dominion Midstream entered into a
Purchase, Sale and Contribution Agreement with Dominion pursuant to which Dominion Midstream purchased from Dominion all of the issued and outstanding membership interests of DCG in exchange for total consideration of approximately $500.8 million,
as adjusted for working capital. Total consideration to Dominion consisted of the issuance of a two-year $300.8 million senior unsecured promissory note, as adjusted for working capital, payable to Dominion at an annual interest rate of 0.6%, and
5,112,139 common units, valued at $200.0 million, representing limited partner interests in Dominion Midstream, to Dominion. The number of units was based on the volume weighted average trading price of Dominion Midstreams common units for the
10 trading days prior to April 1, 2015, or $39.12 per unit. For the three months ended March 31, 2016, total transaction and transition costs of $1.3 million were expensed as incurred to operations and maintenance expense in the Consolidated
Statements of Income. These costs were paid by Dominion. Dominion Midstream subsequently reimbursed Dominion for the total transaction and transition costs. The DCG Acquisition supports the expansion of Dominion Midstreams portfolio of natural
gas terminaling, processing, storage, transportation and related assets.
The contribution of DCG by Dominion to Dominion Midstream is considered to be a
reorganization of entities under common control. Accordingly, Dominion Midstreams net investment in DCG is recorded at Dominions historical cost of $501.6 million as of April 1, 2015. Common control began on January 31, 2015,
concurrent with Dominions acquisition of DCG from SCANA, which was accounted for using the acquisition method of accounting. Accordingly, the Consolidated Financial Statements of Dominion Midstream reflect DCGs financial results
beginning January 31, 2015.
In connection with the DCG Acquisition, Dominion Midstream entered into a registration rights agreement with Dominion
pursuant to which Dominion Midstream must register the 5,112,139 common units issued to Dominion at its request, subject to certain terms and conditions. Additionally, at the time of Dominions acquisition of DCG, DCG entered into services
agreements and an intercompany tax sharing agreement with Dominion as described in Note 14.
Note 3. Significant Accounting Policies
Interim Financial Information and Estimates
As permitted
by the rules and regulations of the SEC, Dominion Midstreams accompanying unaudited Consolidated Financial Statements exclude certain footnote disclosures normally included in annual audited consolidated financial statements prepared in
accordance with GAAP. These unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes in Dominion Midstreams Annual Report on Form 10-K for the year ended December 31, 2015.
In the opinion of management, the accompanying unaudited Consolidated Financial Statements contain all adjustments necessary to present fairly Dominion
Midstreams financial position at March 31, 2016, and its results of operations, cash flows and changes in equity for the three months ended March 31, 2016 and 2015. Such adjustments are normal and recurring in nature unless otherwise noted.
Dominion Midstream makes certain estimates and assumptions in preparing its Consolidated Financial Statements in accordance with GAAP. These estimates
and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. Actual
results may differ from those estimates.
The results of operations for interim periods are not necessarily indicative of the results expected for the
full year. Information for quarterly periods is affected by seasonal variations in sales, rate changes, purchased gas expenses and other factors.
Note
4. Net Income Per Limited Partner Unit
Net income per limited partner unit applicable to common and subordinated units is computed by dividing the
respective limited partners interest in net income attributable to Dominion Midstream, after deducting any incentive distributions, by the weighted average number of common units and subordinated units outstanding. Because Dominion Midstream
has more than one class of participating securities, the two-class method is used when calculating the net income per unit applicable to limited partners. The classes of participating securities include common units, subordinated units and IDRs.
Dominion Midstreams net income is allocated to the limited partners in accordance with their respective partnership interests, after giving effect
to priority income allocations for incentive distributions, if any, to Dominion, the holder of the IDRs, pursuant to the partnership agreement. The distributions are declared and paid following the close of each quarter. Earnings in excess of
distributions are allocated to the limited partners based on their respective ownership interests. Payments made to Dominion Midstreams unitholders are determined in relation to actual distributions declared and are not based on the net income
allocations used in the calculation of earnings per limited partner unit.
11
Diluted net income per limited partner unit is the same as basic net income per limited partner unit as there
were no potentially dilutive common or subordinated units outstanding at March 31, 2016 and 2015.
The calculation of earnings per limited partner unit is
as follows:
|
|
|
|
|
|
|
Three Months Ended
March 31,
2016
|
|
(millions)
|
|
|
|
Net income attributable to partners
|
|
$
|
23.1
|
|
Distributions declared on
(1)
:
|
|
|
|
|
IDRs
(2)
|
|
|
0.4
|
|
Common unitholders
|
|
|
10.3
|
|
Subordinated unitholders
|
|
|
7.1
|
|
|
|
|
|
|
Total distributions declared
|
|
|
17.8
|
|
|
|
|
|
|
Undistributed earnings
|
|
$
|
5.3
|
|
|
|
|
|
|
(1)
|
On April 19, 2016, the Board of Directors of our general partner declared a quarterly cash distribution of $0.2245 per unit, totaling $17.8 million for the three months ended March 31, 2016. This distribution will be
paid on May 13, 2016 to unitholders of record on May 3, 2016. The amount of distributions declared for the three months ended March 31, 2016 is based on the units outstanding at that date.
|
(2)
|
Dominion is a non-economic general partner that holds all of the IDRs.
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
2015
|
|
(millions)
|
|
|
|
Net income attributable to partners
|
|
$
|
11.8
|
|
Distributions declared on
(1)
:
|
|
|
|
|
IDRs
(2)
|
|
|
|
|
Common unitholders
|
|
|
5.6
|
|
Subordinated unitholders
|
|
|
5.6
|
|
|
|
|
|
|
Total distributions declared
|
|
|
11.2
|
|
|
|
|
|
|
Undistributed earnings
|
|
$
|
0.6
|
|
|
|
|
|
|
(1)
|
On April 22, 2015, the Board of Directors of our general partner declared a quarterly cash distribution of $0.1750 per unit, totaling $12.1 million for the three months ended March 31, 2015. This distribution was
paid on May 15, 2015 to unitholders of record on May 5, 2015. The amount of distributions declared shown above is based on the units outstanding at March 31, 2015, and therefore excludes $0.9 million of distributions that were paid on 5,112,139
common units issued to Dominion on April 1, 2015, in connection with the acquisition of DCG. See Note 2 for further information.
|
(2)
|
Dominion is a non-economic general partner that holds all of the IDRs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income per limited partner unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Units
|
|
|
Subordinated
Units
|
|
|
General Partner
|
|
|
Total
|
|
(millions, except for weighted average units and per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions declared
|
|
$
|
10.3
|
|
|
$
|
7.1
|
|
|
$
|
0.4
|
|
|
$
|
17.8
|
|
Undistributed earnings
|
|
|
3.1
|
|
|
|
2.2
|
|
|
|
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to partners
|
|
$
|
13.4
|
|
|
$
|
9.3
|
|
|
$
|
0.4
|
|
|
$
|
23.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average units outstanding
|
|
|
45,722,112
|
|
|
|
31,972,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per limited partner unit
|
|
$
|
0.29
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income per limited partner unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Units
|
|
|
Subordinated
Units
|
|
|
General Partner
|
|
|
Total
|
|
Three Months Ended March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions declared
|
|
$
|
5.6
|
|
|
$
|
5.6
|
|
|
$
|
|
|
|
$
|
11.2
|
|
Undistributed earnings
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to partners
|
|
$
|
5.9
|
|
|
$
|
5.9
|
|
|
$
|
|
|
|
$
|
11.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average units outstanding
|
|
|
31,980,110
|
|
|
|
31,972,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per limited partner unit
|
|
$
|
0.19
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5. Unit Activity
Activity in the number of units was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
|
|
|
Dominion
|
|
|
Subordinated
|
|
|
General Partner
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
(non-economic interest)
|
|
|
|
|
Balance at December 31, 2015
|
|
|
27,867,938
|
|
|
|
17,846,672
|
|
|
|
31,972,789
|
|
|
|
|
|
|
|
77,687,399
|
|
Unit-based compensation
|
|
|
7,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,761
|
|
Dominion purchase of common
units
(1)
|
|
|
(377,311
|
)
|
|
|
377,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2016
|
|
|
27,498,388
|
|
|
|
18,223,983
|
|
|
|
31,972,789
|
|
|
|
|
|
|
|
77,695,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These shares were purchased by Dominion as part of Dominions program initiated in September 2015 to purchase from the market up to $50.0 million of common units representing limited partner interests in
Dominion Midstream by September 2016 at the discretion of Dominions management.
|
Note 6. Operating Revenue
Dominion Midstreams operating revenue consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
(millions)
|
|
|
|
|
|
|
Gas transportation and storage
|
|
$
|
79.1
|
|
|
$
|
74.7
|
|
Other
|
|
|
3.9
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue
|
|
$
|
83.0
|
|
|
$
|
78.4
|
|
|
|
|
|
|
|
|
|
|
Note 7. Equity Method Investments
The Consolidated Financial Statements include Dominion Midstreams 25.93% noncontrolling partnership interest in Iroquois, which is accounted for under
the equity method. See further discussion of Iroquois in Notes 1 and 10.
During the three months ended March 31, 2016, Dominion Midstream received
distributions of $5.8 million from Iroquois. At March 31, 2016, the carrying amount of Dominion Midstreams investment of $221.1 million exceeded its share of underlying equity in net assets by approximately $122.9 million. The difference
reflects equity method goodwill and is not being amortized.
Summarized financial information provided to us by Iroquois for 100% of Iroquois for the
three months ended March 31, 2016, is presented below.
|
|
|
|
|
(in millions)
|
|
Three Months Ended
March 31, 2016
|
|
Revenues
|
|
$
|
53.0
|
|
Operating income
|
|
|
28.8
|
|
Net income
|
|
|
24.6
|
|
13
Note 8. Regulatory Assets and Liabilities
Regulatory assets and liabilities include the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
(millions)
|
|
|
|
|
|
|
Regulatory assets:
|
|
|
|
|
|
|
|
|
Unrecovered gas costs
(1)
|
|
$
|
2.2
|
|
|
$
|
1.4
|
|
Other
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
Regulatory assets-current
|
|
|
2.5
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
Income taxes recoverable through future
rates
(2)
|
|
|
2.7
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
Regulatory assets-non-current
|
|
|
2.7
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
Total regulatory assets
|
|
$
|
5.2
|
|
|
$
|
4.2
|
|
|
|
|
|
|
|
|
|
|
Regulatory liabilities:
|
|
|
|
|
|
|
|
|
Overrecovered gas costs
(1)
|
|
$
|
|
|
|
$
|
0.1
|
|
LNG cargo obligations
(3)
|
|
|
1.5
|
|
|
|
3.0
|
|
Customer bankruptcy settlement
(4)
|
|
|
3.2
|
|
|
|
3.1
|
|
Other
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
Regulatory liabilities-current
|
|
|
5.1
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
Provision for future cost of
removal
(5)
|
|
|
46.6
|
|
|
|
45.7
|
|
Customer bankruptcy settlement
(4)
|
|
|
19.7
|
|
|
|
20.5
|
|
Other
|
|
|
0.6
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
Regulatory liabilities-non-current
|
|
|
66.9
|
|
|
|
66.7
|
|
|
|
|
|
|
|
|
|
|
Total regulatory liabilities
|
|
$
|
72.0
|
|
|
$
|
73.4
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Reflects unrecovered/overrecovered gas costs, which are subject to annual filings with FERC.
|
(2)
|
Amounts to be recovered through future rates to pay income taxes that become payable by unitholders when rate revenue is provided to recover AFUDC-equity when such amounts are recovered through book depreciation.
|
(3)
|
Reflects obligations to the Import Shippers for LNG cargo received. See Note 12 to the Consolidated Financial Statements in Dominion Midstreams Annual Report on Form 10-K for the year ended December 31,
2015 for further information.
|
(4)
|
Represents the balance of proceeds from the monetization of a bankruptcy claim acquired as part of the DCG Acquisition, which is being amortized into operating revenue through February 2024.
|
(5)
|
Rates charged to customers include a provision for the cost of future activities to remove assets that are expected to be incurred at the time of retirement.
|
At March 31, 2016, approximately $2.5 million of regulatory assets represented past expenditures on which Dominion Midstream does not currently earn a return.
These expenditures are expected to be recovered within one year.
Note 9. Regulatory Matters
FERC regulates the transportation and sale for resale of natural gas in interstate commerce under the NGA and the Natural Gas Policy Act of 1978, as amended.
Under the NGA, FERC has authority over rates, terms and conditions of services performed by Cove Point and DCG. FERC also has jurisdiction over siting, construction and operation of natural gas import facilities and interstate natural gas pipeline
facilities.
There have been no significant developments regarding the regulatory matters disclosed in Note 12 to the Consolidated Financial Statements in
Dominion Midstreams Annual Report on Form 10-K for the year ended December 31, 2015.
In 2014, DCG executed three binding precedent agreements for
the approximately $120 million Transco to Charleston Project. In March 2016, DCG filed an application to request FERC authorization to construct and operate the project facilities, which are expected to be placed into service in the fourth quarter
of 2017.
Note 10. Variable Interest Entities
The
primary beneficiary of a VIE is required to consolidate the VIE and to disclose certain information about its significant variable interests in the VIE. The primary beneficiary of a VIE is the entity that has both 1) the power to direct the
activities that most significantly impact the entitys economic performance and 2) the obligation to absorb losses or receive benefits from the entity that could potentially be significant to the VIE.
14
Cove Point
Dominion Midstream concluded that Cove Point is a VIE due to the limited partners lacking the characteristics of a controlling financial
interest. Dominion Midstream is the primary beneficiary of Cove Point as it has the power to direct the activities that most significantly impact its economic performance as well as the obligation to absorb losses and benefits which could be
significant to it.
Iroquois
Dominion Midstream
previously concluded that Iroquois was a VIE because a non-affiliated Iroquois equity holder had the ability during a limited period of time to transfer its ownership interests to another Iroquois equity holder or its affiliate. As such right no
longer exists at March 31, 2016, Dominion Midstream concluded that Iroquois is no longer a VIE.
DRS, DCGS and Dominion Payroll
In connection with the Offering, our general partner entered into a services agreement with DRS. DRS provides administrative, management and other services to
Dominion and its subsidiaries as a subsidiary service company. From time to time and at the option of our general partner, our general partner will request that DRS provide, and reimburse DRS for the cost of providing such administrative, management
and other services as it deems necessary or appropriate for our operations. We will reimburse our general partner and its affiliates for the associated costs of obtaining these services.
Additionally, in connection with Dominions acquisition of DCG, DCG entered into services agreements beginning February 1, 2015 with DRS, for similar
services as described above, and with Dominion Payroll, which provides human resources and operations services to Dominion and its subsidiaries as a subsidiary service company. Effective January 1, 2016, DCGS provides these services to Dominion
Midstream with Dominion Payroll no longer providing any services to Dominion Midstream.
Dominion Midstream purchased shared services from DRS and DCGS of
approximately $6.7 million and $5.0 million, respectively, during the three months ended March 31, 2016. Dominion Midstream purchased shared services from DRS and Dominion Payroll of approximately $3.6 million and $1.9 million, respectively, for the
three months ended March 31, 2015. The Consolidated Balance Sheets at March 31, 2016 and December 31, 2015 include amounts due from Dominion Midstream to DRS, DCGS and Dominion Payroll of approximately $5.2 million and $2.8 million, respectively.
Dominion Midstream determined that neither it nor any of its consolidated entities is the primary beneficiary of DRS, DCGS or Dominion Payroll, as
neither it nor any of its consolidated entities has both the power to direct the activities that most significantly impact their economic performance as well as the obligation to absorb losses and benefits which could be significant to them. Neither
Dominion Midstream nor any of its consolidated entities has any obligation to absorb more than its allocated share of DRS, DCGS or Dominion Payroll costs.
Note 11. Affiliated Long-Term Debt
In connection with
the DCG Acquisition, Dominion Midstream issued a two-year, $300.8 million senior unsecured promissory note payable to Dominion, as adjusted for working capital, at an annual fixed interest rate of 0.6%. Interest on the note is payable
quarterly, and all principal and accrued interest is due and payable at maturity on April 1, 2017, which under certain conditions can be extended at the option of Dominion Midstream to October 1, 2017. Interest charges related to Dominion
Midstreams borrowing from Dominion were $0.5 million for the three months ended March 31, 2016. At March 31, 2016 and December 31, 2015, accrued interest payable to Dominion of $0.5 million was recorded in payables to affiliates on the
Consolidated Balance Sheets.
The debt instrument described above is reported at historical cost. At March 31, 2016, the fair value of Dominion
Midstreams outstanding debt was $295.9 million. The estimated fair value has been determined using available market information and valuation methodologies considered appropriate by management. The fair value was calculated using market
interest rates currently available for issuance of debt with similar terms and remaining maturities. The fair value measurement is classified as Level 2.
The key terms of the note payable to Dominion include a prohibition on the incurrence of additional indebtedness (other than under the credit facility with
Dominion discussed in Note 14) and a negative pledge applicable to liens on the assets of Dominion Midstream, but which does not apply to the assets of subsidiaries of Dominion Midstream. The note payable does not include any financial
covenants. If Dominion Midstream fails to make payments under the note payable or becomes subject to bankruptcy or other insolvency proceedings, Dominion may accelerate Dominion Midstreams payment obligations under the note payable.
15
Note 12. Commitments and Contingencies
As a result of issues generated in the ordinary course of business, Dominion Midstream is involved in legal proceedings before various courts and is
periodically subject to governmental examinations (including by FERC), inquiries and investigations. Certain legal proceedings and governmental examinations involve demands for unspecified amounts of damages, are in an initial procedural phase,
involve uncertainty as to the outcome of pending appeals or motions, or involve significant factual issues that need to be resolved, such that it is not possible for Dominion Midstream to estimate a range of possible loss. For such matters that
Dominion Midstream cannot estimate, a statement to this effect is made in the description of the matter. Other matters may have progressed sufficiently through the litigation or investigative processes such that Dominion Midstream is able to
estimate a range of possible loss. For legal proceedings and governmental examinations for which Dominion Midstream is able to reasonably estimate a range of possible losses, an estimated range of possible loss is provided, in excess of the accrued
liability (if any) for such matters. Estimated ranges of loss are inclusive of legal fees and net of any anticipated insurance recoveries. Any estimated range is based on currently available information and involves elements of judgment and
significant uncertainties. Any accrued liability is recorded on a gross basis with a receivable also recorded for any probable insurance recoveries. Any estimated range of possible loss may not represent Dominion Midstreams maximum possible
loss exposure. The circumstances of such legal proceedings and governmental examinations will change from time to time and actual results may vary significantly from the current estimate. Management does not anticipate that the liabilities, if any,
arising from such proceedings would have a material effect on Dominion Midstreams financial position, liquidity or results of operations.
Cove
Point Natural Heritage Trust
Under the terms of the 2005 Agreement, Cove Point is required to make an annual contribution to the Cove Point Natural
Heritage Trust, an affiliated non-profit trust focused on the preservation and protection of ecologically sensitive sites at or near Cove Point, of $0.3 million for each year the facility is in operation. These annual payments are recorded in other
operations and maintenance expense in the Consolidated Statements of Income. If Cove Point voluntarily tenders title according to the terms of this agreement, no contributions are required. There are no current plans to voluntarily tender title to
the Cove Point site.
Surety Bonds
At March 31,
2016, Cove Point had purchased $10.9 million of surety bonds. Under the terms of surety bonds, Cove Point is obligated to indemnify the respective surety bond company for any amounts paid.
Lease Commitments
Dominion Midstream leases various
facilities, vehicles and equipment under operating lease arrangements, the majority of which include terms of one year or less, require payments on a monthly or annual basis and can be canceled at any time. Rental expense for Dominion Midstream
totaled $0.6 million and $0.7 million for the three months ended March 31, 2016 and 2015, respectively. The majority of rent expense is included within other operations and maintenance expense in the Consolidated Statements of Income.
Note 13. Credit Risk
Credit risk is the risk of
financial loss if counterparties fail to perform their contractual obligations. In order to minimize overall credit risk, credit policies are maintained, including the evaluation of counterparty financial condition. In addition, counterparties may
make available collateral, including letters of credit, payment guarantees or cash deposits.
Dominion Midstream provides service to approximately 70
customers, including the Storage Customers, marketers or end users and the Import Shippers. The two largest customers comprised approximately 72% and 70% of the total transportation and storage revenues for the three months ended March 31, 2016 and
2015, with Dominion Midstreams largest customer representing approximately 56% and 59% of such amounts in each period, respectively.
Dominion
Midstream maintains a provision for credit losses based on factors surrounding the credit risk of its customers, historical trends and other information. At March 31, 2016 and December 31, 2015, the provision for credit losses was less than
$0.1 million. Management believes, based on credit policies and the March 31, 2016 provision for credit losses, that it is unlikely that a material adverse effect on financial position, results of operations or cash flows would occur as a
result of counterparty nonperformance.
Note 14. Related-Party Transactions
Dominion Midstream engages in related-party transactions primarily with other Dominion subsidiaries (affiliates), including our general partner. Dominion
Midstreams receivable and payable balances with affiliates are settled based on contractual terms or on a monthly basis, depending on the nature of the underlying transactions. Cove Point participates in certain
16
Dominion benefit plans as described in Note 16 to the Consolidated Financial Statements in Dominion Midstreams Annual Report on Form 10-K for the year ended December 31, 2015. In Dominion
Midstreams Consolidated Balance Sheets at March 31, 2016 and December 31, 2015, amounts due to Dominion associated with these benefit plans included in pension and other postretirement benefit liabilities were $5.3 million and $5.0 million,
respectively, and amounts due from Dominion at March 31, 2016 included in other current assets were $0.2 million. There were no such amounts due from Dominion at December 31, 2015. Transactions related to the DCG Acquisition are described in Notes 2
and 11. A discussion of the remaining significant related party transactions follows.
Transactions with Affiliates
DRS provides accounting, legal, finance and certain administrative and technical services to Dominion Midstream. Effective January 1, 2016, DCGS provides human
resources and operations services to Dominion Midstream as a subsidiary service company. Prior to January 1, 2016, Dominion Payroll provided human resources and operations services to Dominion Midstream as a subsidiary service company. Refer to Note
10 for further information.
Dominion may seek reimbursement from DCG for costs incurred related to Dominions transition services agreement with
SCANA to provide administrative functions related to DCG. For the three months ended March 31, 2016, DCG reimbursed Dominion a total of $0.6 million for such costs. During the three months ended March 31, 2015, Dominion did not seek reimbursement
for any such costs.
Dominion Midstream provides transportation services to affiliates and affiliates provide goods and services to Dominion Midstream.
Affiliated transactions are presented below:
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|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
(millions)
|
|
|
|
|
|
|
Sales of natural gas transportation services to affiliates
|
|
$
|
0.5
|
|
|
$
|
0.7
|
|
Purchased gas from affiliates
|
|
|
0.1
|
|
|
|
0.2
|
|
Goods and services provided by affiliates to Dominion Midstream
(1)
|
|
|
13.3
|
|
|
|
7.2
|
|
(1)
|
Includes $3.9 million and $2.4 million of capitalized expenditures for the three months ended March 31, 2016 and 2015, respectively.
|
Dominion Credit Facility
In connection with the
Offering, Dominion Midstream entered into a credit facility with Dominion with a borrowing capacity of $300 million. A summary of certain key terms of the credit facility with Dominion is included in Note 20 to the Consolidated Financial
Statements in Dominion Midstreams Annual Report on Form 10-K for the year ended December 31, 2015. At March 31, 2016 and December 31, 2015, $9.5 million and $5.9 million was outstanding against the credit facility, respectively. Outstanding
borrowings are presented within current liabilities as such amounts could become payable on demand after a 90-day termination notice provided by either party. No such notice has been provided through the date of this filing. Interest charges
related to Dominion Midstreams borrowings against the facility were less than $0.1 million for the three months ended March 31, 2016. The facility was undrawn during the three months ended March 31, 2015.
Income Taxes
DCG participated in Dominions
intercompany tax sharing agreement from February 1, 2015 through March 31, 2015. DCGs participation in this tax sharing agreement was subsequently terminated in connection with the DCG Acquisition. At the time of the DCG Acquisition,
DCG settled income taxes payable and net deferred income taxes of $13.4 million through an equity transaction with Dominion.
Natural Gas Imbalances
Dominion Midstream maintains natural gas imbalances with affiliates. The imbalances with affiliates are provided below:
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|
|
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
(millions)
|
|
|
|
|
|
|
Imbalances payable to affiliates
|
|
$
|
3.5
|
|
|
$
|
0.8
|
|
17
Right of First Offer
In connection with the Offering, Dominion Midstream entered into a right of first offer agreement with Dominion as described in Note 20 to the Consolidated
Financial Statements in Dominion Midstreams Annual Report on Form 10-K for the year ended December 31, 2015. There have been no changes to this agreement.
Contributions from Dominion
For the three months ended
March 31, 2016, Dominion contributed $244.9 million to Cove Point to fund capital expenditures related to the Liquefaction Project. No such amounts were contributed for the three months ended March 31, 2015. In April 2016, Dominion contributed an
additional $85.1 million to Cove Point to fund capital expenditures related to the Liquefaction Project. In February 2015, Dominion contributed $1.3 million in cash to DCG to fund operations.
Transaction and transition costs incurred by the DCG Predecessor were attributed to Dominion Midstream and expensed in operations and maintenance expense in
the Consolidated Statements of Income. At the time of the DCG Acquisition, Dominion Midstream settled amounts payable to Dominion of $1.0 million through equity contributions from Dominion.
Note 15. Income Taxes
Dominion Midstream is
organized as an MLP, a pass-through entity for U.S. federal and state income tax purposes. Each unitholder is responsible for taking into account the unitholders respective share of Dominion Midstreams items of taxable income, gain,
loss and deduction in the preparation of income tax returns. Upon the closing of the Offering, Cove Point became a pass-through entity for U.S. federal and state income tax purposes. Effective April 1, 2015, the date of the DCG Acquisition, DCG is
treated as a component of Dominion Midstream for income tax purposes. Accordingly, Dominion Midstreams Consolidated Financial Statements do not include income taxes for the period subsequent to the Offering, with the exception of income taxes
attributable to the DCG Predecessor.
DCG operated as a taxable corporation at the time of Dominions acquisition of DCG. In March 2015, DCG
converted to a single member limited liability company and as a result, became a disregarded entity for income tax purposes and was treated as a taxable division of its corporate parent. Its business activities from January 31, 2015 through
March 31, 2015, will be included in the consolidated U.S. federal and certain state income tax returns of Dominion.
Current income taxes for DCG were
based on taxable income or loss, determined on a separate company basis, and, where applicable, settled in accordance with the principles of Dominions intercompany tax sharing agreement. The settlement of DCGs federal and state income
taxes payable and net deferred income taxes is reflected as an equity transaction in Dominion Midstreams Consolidated Financial Statements.
For the
three months ended March 31, 2016 and 2015, the statutory U.S. federal income tax rate reconciles to the effective income tax rate as follows:
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|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
|
2015
|
|
U.S. statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Partnership income not subject to income
taxes
(1)
|
|
|
(35.0
|
)
|
|
|
(30.8
|
)
|
Increases resulting from:
|
|
|
|
|
|
|
|
|
State taxes, net of federal
benefit
(2)
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
|
%
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
(1)
|
Reflects the pass-through entity status of Dominion Midstream, including the operations of DCG subsequent to the DCG Acquisition, and Cove Point.
|
(2)
|
2015 amounts are attributable to the operations of DCG prior to the DCG Acquisition.
|
See Note 21 to
the Consolidated Financial Statements in Dominion Midstreams Annual Report on Form 10-K for the year ended December 31, 2015 for additional information.
Note 16. Operating Segment
Dominion Midstream is
organized primarily on the basis of products and services sold in the U.S. Dominion Energy, Dominion Midstreams operating segment, consists of gas transportation, storage and regasification services.
Dominion Midstream also reports a Corporate and Other segment. The Corporate and Other segment primarily includes items attributable to Dominion
Midstreams operating segment that are not included in profit measures evaluated by executive management in assessing the segments performance or in allocating resources.
The following table presents segment information pertaining to Dominion Midstreams operations:
18
|
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|
|
|
|
|
|
|
|
|
|
|
|
Dominion Energy
|
|
|
Corporate and
Other
|
|
|
Total
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
83.0
|
|
|
$
|
|
|
|
$
|
83.0
|
|
Earnings from equity method investee
|
|
|
6.4
|
|
|
|
|
|
|
|
6.4
|
|
Net income including noncontrolling interest and DCG Predecessor
|
|
|
51.8
|
|
|
|
|
|
|
|
51.8
|
|
Net income including noncontrolling interest
|
|
|
51.8
|
|
|
|
|
|
|
|
51.8
|
|
Net income attributable to partners
|
|
|
23.1
|
|
|
|
|
|
|
|
23.1
|
|
Three Months Ended March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
78.4
|
|
|
$
|
|
|
|
$
|
78.4
|
|
Net income (loss) including noncontrolling interest and DCG Predecessor
|
|
|
43.8
|
|
|
|
(1.0
|
)
|
|
|
42.8
|
|
Net income including noncontrolling interest
|
|
|
40.5
|
|
|
|
|
|
|
|
40.5
|
|
Net income attributable to partners
|
|
|
11.8
|
|
|
|
|
|
|
|
11.8
|
|
19