The accompanying notes are an integral part of Dominion Energy Midstream’s Consolidated Financial Statements.
The accompanying notes are an integral part of Dominion Energy Midstream’s Consolidated Financial Statements.
The accompanying notes are an integral part of Dominion Energy Midstream's Consolidated Financial Statements.
The accompanying notes are an integral part of Dominion Energy Midstream's Consolidated Financial Statements.
The accompanying notes are an integral part of Dominion Energy Midstream's Consolidated Financial Statements.
The accompanying notes are an integral part of Dominion Energy Midstream's Consolidated Financial Statements.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
Note 1. Description of Business and Basis of Presentation
Description of Business
Dominion Energy Midstream is a Delaware limited partnership formed in March 2014 by Dominion MLP Holding Company, LLC and Dominion Energy Midstream GP, LLC, both indirect wholly-owned subsidiaries of Dominion Energy, to grow a portfolio of natural gas terminaling, processing, storage, transportation and related assets.
Dominion Energy Midstream holds 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.
In addition, Dominion Energy Midstream owns DECG and a 25.93% noncontrolling partnership interest in Iroquois, both of which are FERC-regulated interstate natural gas pipelines.
In December 2016, Dominion Energy Midstream acquired from Dominion Energy all of the issued and outstanding membership interests in Dominion Energy Questar Pipeline as described further in Note 2. Dominion Energy Questar Pipeline owns and operates nearly 2,200 miles of interstate natural gas pipelines and 18 transmission and storage compressor stations in the western U.S.
Basis of Presentation
The contribution by Dominion Energy to Dominion Energy 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 Energy Midstream’s basis is equal to Dominion Energy’s cost basis in the general partner interest in Cove Point and a portion of the Preferred Equity Interest. As discussed in Note 14 to the Consolidated Financial Statements in Dominion Energy Midstream’s Annual Report on Form 10-K for the year ended December 31, 2016, Dominion Energy Midstream is the primary beneficiary of, and therefore consolidates, Cove Point. As such, Dominion Energy Midstream’s investment in the Preferred Equity Interest and Cove Point's preferred equity interest are eliminated in consolidation. Dominion Energy's retained common equity interest in Cove Point is reflected as noncontrolling interest.
The Dominion Energy Questar Pipeline Acquisition is considered to be a reorganization of entities under common control. As a result, Dominion Energy Midstream’s basis in Dominion Energy Questar Pipeline is equal to Dominion Energy’s cost basis in the assets and liabilities of Dominion Energy Questar Pipeline. On December 1, 2016, Dominion Energy Questar Pipeline became a wholly-owned subsidiary of Dominion Energy Midstream and is therefore consolidated by Dominion Energy Midstream. The accompanying financial statements and related notes include the historical results and financial position of Dominion Energy Questar Pipeline beginning September 16, 2016, the inception date of common control.
The financial statements for all periods presented include costs for certain general, administrative and corporate expenses assigned by DES, DECGS or DEQPS to Dominion Energy Midstream on the basis of direct and allocated methods in accordance with Dominion Energy Midstream's services agreements with DES, DECGS and DEQPS. Where costs incurred cannot be determined by specific identification, the costs are allocated based on the proportional level of effort devoted by DES, DECGS or DEQPS resources that are attributable to the entities, determined by reference to number of employees, salaries and wages and other similar measures for the relevant DES, DECGS or DEQPS service. Management believes the assumptions and methodologies underlying the allocation of general corporate overhead expenses are reasonable.
Note 2. Acquisitions
Dominion Energy Questar Pipeline
In October 2016, Dominion Energy Midstream, following approval by the Conflicts Committee of Dominion Energy Midstream GP, LLC, its general partner, entered into the Dominion Energy Questar Pipeline Contribution Agreement to acquire Dominion Energy Questar Pipeline from Dominion Energy. Upon closing of the agreement on December 1, 2016, Dominion Energy Midstream became the owner of all of the issued and outstanding membership interests of Dominion Energy Questar Pipeline in exchange for consideration consisting of: (1) 6,656,839 common units with a value of $167.3 million (the number
12
of Dominion E
nergy Midstream common units issued to Dominion Energy was determined by the volume-weighted average trading price of Dominion Energy Midstream's common units on the NYSE for the 10-day trading period immediately preceding closing), (2) 11,365,628 Series A
Preferred Units with a value of $300.0 million and (3) a cash payment of $822.7 million, $300.0 million of which was treated as a debt-financed distribution, for total consideration of $1.29 billion. In addition, Dominion Energy Questar Pipeline's debt of
$435.0 million remained outstanding. As a result of the transaction, Dominion Energy Midstream owns 100% of the membership interests in Dominion Energy Questar Pipeline and therefore consolidates Dominion Energy Questar Pipeline in its financial statement
s. Because the contribution of Dominion Energy Questar Pipeline by Dominion Energy to Dominion Energy Midstream was considered a reorganization of entities under common control, Dominion Energy Questar Pipeline's assets and liabilities were recorded in Dom
inion Energy Midstream's consolidated financial statements at Dominion Energy’s historical cost of $989.3 million at December 1, 2016. Common control began on September 16, 2016, concurrent with Dominion Energy's acquisition of Dominion Energy Questar, whi
ch was accounted for using the acquisition method of accounting. Accordingly, the consolidated financial statements of Dominion Energy Midstream reflect Dominion Energy Questar Pipeline's financial results beginning September 16, 2016. The Dominion Energy
Questar Pipeline Acquisition supports the expansion of Dominion Energy Midstream's portfolio of natural gas terminaling, processing, storage, transportation and related assets.
To facilitate the financing of the acquisition of Dominion Energy Questar Pipeline, Dominion Energy Midstream completed a public issuance of 15,525,000 common units, which included a 2,025,000 common unit over-allotment option that was exercised in full by the underwriters, resulting in proceeds of $347.6 million, net of offering costs of $12.6 million, in November 2016. In addition, in December 2016, Dominion Energy Midstream completed the private placement of 5,990,634 common units with a value of $137.5 million (determined by the price of the common units in the public offering discussed above, less $0.2475 in accordance with the Private Placement Agreement) and 18,942,714 Series A Preferred Units with a value of $500.0 million. Also in December 2016, Dominion Energy Midstream entered into a $300.0 million three-year term loan agreement, which bears interest at a variable rate. The key terms of the term loan agreement are discussed in Note 15 to the Consolidated Financial Statements in Dominion Energy Midstream's Annual Report on Form 10-K for the year ended December 31, 2016. Offering expenses associated with the private placement of common units ($3.1 million), Series A Preferred Units ($9.9 million) and the term loan agreement ($1.5 million) were funded through a draw on the existing revolving credit facility with Dominion Energy. As a condition to closing under the Dominion Energy Questar Pipeline Contribution Agreement, Dominion Energy Midstream repaid the outstanding $300.8 million senior unsecured promissory note payable to Dominion Energy and repurchased 6,656,839 common units from Dominion Energy for $167.3 million (based on the volume-weighted average trading price of Dominion Energy Midstream's common units on the NYSE for the 10-day trading period immediately preceding closing) in December 2016.
In connection with the private placement of common units and Series A Preferred Units, Dominion Energy Midstream entered into a registration rights agreement under which Dominion Energy Midstream was required to register (1) the common units by March 31, 2017, (2) common units issuable upon conversion of the Series A Preferred Units by December 1, 2018, and (3) the Series A Preferred Units no earlier than December 1, 2021 provided that the required amount of units remain outstanding. Dominion Energy Midstream’s registration statement for the applicable common units became effective in February 2017.
In connection with the Dominion Energy Questar Pipeline Acquisition, transition costs of $4.1 million and $4.3 million incurred by our general partner were expensed to operations and maintenance expense in the Consolidated Statements of Income for the three and six months ended June 30, 2017, respectively. Dominion Energy did not seek reimbursement for $4.0 million and $4.2 million for the three and six months ended June 30, 2017, respectively, of such costs and accordingly, Dominion Energy Midstream recognized an equity contribution from the general partner.
Dominion Energy Questar Pipeline owns and operates interstate natural gas pipelines and storage facilities in the western U.S. providing natural gas transportation and underground storage services in Utah, Wyoming and Colorado. Dominion Energy Questar Pipeline\'s operations are primarily regulated by FERC. At December 31, 2016, Dominion Energy Questar Pipeline owned and operated nearly 2,200 miles of natural gas transportation pipelines across northeastern and central Utah, northwestern Colorado and southwestern Wyoming and nearly 56 billion cubic feet of working gas storage capacity. Dominion Energy Questar Pipeline's core transportation system is strategically located near large reserves of natural gas in six major Rocky Mountain producing areas. Dominion Energy Questar Pipeline transports natural gas from these producing areas to other major pipeline systems, Dominion Energy Questar Gas Company's distribution system and other utility systems. Dominion Energy Questar Pipeline operates and owns 50% of White River Hub, an 11-mile FERC-regulated natural gas transportation pipeline in western Colorado, which is accounted for under the equity method. Dominion Energy Questar Pipeline also owns gathering lines and processing facilities in Utah, through which it provides gas-processing services.
13
Note 3. Significant Accounting Policies
Interim Financial Information and Estimates
As permitted by the rules and regulations of the SEC, Dominion Energy Midstream's accompanying unaudited Consolidated Financial Statements contain certain condensed financial information and 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 Energy Midstream’s Annual Report on Form 10-K for the year ended December 31, 2016.
In the opinion of management, the accompanying unaudited Consolidated Financial Statements contain all adjustments necessary to present fairly Dominion Energy Midstream's financial position at June 30, 2017, its results of operations for the three and six months ended June 30, 2017 and 2016 and its cash flows and changes in equity for the six months ended June 30, 2017 and 2016. Such adjustments are normal and recurring in nature unless otherwise noted.
Dominion Energy 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.
Certain amounts in Dominion Energy Midstream's 2016 audited Consolidated Financial Statements and Notes have been reclassified to conform to the 2017 presentation for comparative purposes. The reclassifications did not affect Dominion Energy Midstream's net income, total assets, liabilities, equity or cash flows.
With the exception of the items described below, there have been no significant changes from Note 3 to the Consolidated Financial Statements in Dominion Energy Midstream's Annual Report on Form 10-K for the year ended December 31, 2016.
Derivative Instruments
Effective March 2017, Dominion Energy Midstream uses derivative instruments such as swaps to manage interest rate risks of its business operations. All derivatives, except those for which an exception applies, are required to be reported in the Consolidated Balance Sheets at fair value. Derivative contracts representing unrealized gain positions are reported as derivative assets. Derivative contracts representing unrealized losses are reported as derivative liabilities. Dominion Energy Midstream does not offset amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement. Dominion Energy Midstream had no margin assets or liabilities associated with cash collateral at June 30, 2017. See Note 8 for further information about derivatives.
Derivative Instruments Designated as Hedging Instruments
Dominion Energy Midstream has designated all of its derivative instruments as cash flow hedges for accounting purposes. For all derivatives designated as hedges, Dominion Energy Midstream formally documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and the strategy for using the hedging instrument. Dominion Energy Midstream assesses whether the hedging relationship between the derivative and the hedged item is highly effective at offsetting changes in cash flows both at the inception of the hedging relationship and on an ongoing basis. Any change in the fair value of the derivative that is not effective at offsetting changes in the cash flows of the hedged item is recognized currently in earnings. Hedge accounting is discontinued prospectively for derivatives that cease to be highly effective hedges. The cash flows from the cash flow hedge derivatives and from the related hedged items are classified in operating cash flows.
Dominion Energy Midstream uses interest rate swaps to hedge its exposure to the variability of cash flows as a result of the variable interest rates on long-term debt. Changes in the fair value of the derivatives are reported in AOCI, to the extent they are effective at offsetting changes in the hedged item. Any derivative gains or losses reported in AOCI are reclassified to earnings when the forecasted item is included in earnings, or earlier, if it becomes probable that the forecasted transaction will not occur. Hedge accounting is discontinued if the occurrence of the forecasted transaction is no longer probable.
14
Note 4. Net Income Per Limited Partner Unit
Basic 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 Energy Midstream, after deducting any net income attributable to Series A Preferred Units and incentive distributions, by the weighted average number of common units and subordinated units outstanding. Because Dominion Energy 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, Series A Preferred Units and IDRs. See Note 2 to the Consolidated Financial Statements in Dominion Energy Midstream's Annual Report on Form 10-K for the year ended December 31, 2016 for further information about the Series A Preferred Units.
Dominion Energy Midstream’s net income is allocated to the limited partners in accordance with their respective partnership interests, after giving effect to priority income allocations to the holders of the Series A Preferred Units and incentive distributions, if any, to Dominion Energy, 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 common and subordinated unitholders based on their respective ownership interests. Payments made to Dominion Energy Midstream's 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.
Diluted net income per limited partner unit reflects the potential dilution that could occur if securities or agreements to issue common units, such as the Series A Preferred Units, were converted into common units. When it is determined that potential common units resulting from the Series A Preferred Unit conversion should be included in the diluted net income per limited partner unit calculation, the impact is calculated using the two class method. There were no potentially dilutive common units outstanding at June 30, 2016. Basic and diluted earnings per unit applicable to subordinated limited partnerships are the same because there are no potentially dilutive subordinated units outstanding.
The calculation of net income per limited partner unit is as follows:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to partners
|
|
$
|
42.0
|
|
|
$
|
22.5
|
|
|
$
|
94.2
|
|
|
$
|
45.6
|
|
Less: General partner allocation
(1)
|
|
|
(4.0
|
)
|
|
|
(0.1
|
)
|
|
|
(4.2
|
)
|
|
|
(0.1
|
)
|
Less: Preferred unitholder allocation
|
|
|
9.5
|
|
|
|
—
|
|
|
|
19.0
|
|
|
|
—
|
|
Distributions declared on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IDRs
(2)
|
|
|
4.3
|
|
|
|
0.7
|
|
|
|
7.2
|
|
|
|
1.1
|
|
Common unitholders
|
|
|
19.4
|
|
|
|
10.7
|
|
|
|
37.8
|
|
|
|
21.0
|
|
Subordinated unitholder
|
|
|
9.2
|
|
|
|
7.6
|
|
|
|
18.0
|
|
|
|
14.7
|
|
Total distributions declared
|
|
|
32.9
|
|
|
|
19.0
|
|
|
|
63.0
|
|
|
|
36.8
|
|
Undistributed earnings
|
|
$
|
3.6
|
|
|
$
|
3.6
|
|
|
$
|
16.4
|
|
|
$
|
8.9
|
|
(1)
|
Represents amounts recognized as equity contributions from our general partner for incurred amounts for which Dominion Energy did not seek reimbursement. See Notes 2 and 15 for further information.
|
(2)
|
Dominion Energy is a non-economic general partner that holds all of the IDRs.
|
Distributions are declared and paid subsequent to quarter end. The table below summarizes the quarterly distributions on common and subordinated units related to the six months ended June 30, 2017 and 2016.
Quarterly Period Ended
|
|
Total Quarterly
Distribution
(per unit)
|
|
|
Total Cash
Distribution
(in millions)
|
|
|
Date of Declaration
|
|
Date of Record
|
|
Date of Distribution
|
December 31, 2015
|
|
$
|
0.2135
|
|
|
$
|
16.8
|
|
|
January 21, 2016
|
|
February 5, 2016
|
|
February 15, 2016
|
March 31, 2016
|
|
|
0.2245
|
|
|
|
17.8
|
|
|
April 19, 2016
|
|
May 3, 2016
|
|
May 13, 2016
|
June 30, 2016
|
|
|
0.2355
|
|
|
|
19.0
|
|
|
July 22, 2016
|
|
August 5, 2016
|
|
August 15, 2016
|
December 31, 2016
|
|
|
0.2605
|
|
|
|
27.5
|
|
|
January 25, 2017
|
|
February 6, 2017
|
|
February 15, 2017
|
March 31, 2017
|
|
|
0.2740
|
|
|
|
30.1
|
|
|
April 21, 2017
|
|
May 5, 2017
|
|
May 15, 2017
|
June 30, 2017
|
|
|
0.2880
|
|
|
|
32.9
|
|
|
July 21, 2017
|
|
August 4, 2017
|
|
August 15, 2017
|
Record holders of the Series A Preferred Units are entitled to receive cumulative quarterly distributions, payable in cash, payable in kind or a combination thereof at the option of our general partner, equal to $0.3134 per Series A Preferred Unit in
15
respect of each quarter ending before December 1, 2018. The table below summarizes the quarterly distributions on the Series A Preferred Units related to the six months ended June 30, 2017.
Quarterly Period Ended
|
|
Total
Distribution
(in millions)
|
|
|
|
Amount
Payable
in Cash
(in millions)
|
|
|
Amount
Payable
in Kind
(in millions)
|
|
December 31, 2016
|
|
$
|
3.2
|
|
(1)
|
|
$
|
3.2
|
|
|
$
|
—
|
|
March 31, 2017
|
|
|
9.5
|
|
|
|
|
9.5
|
|
|
|
—
|
|
June 30, 2017
|
|
|
9.5
|
|
|
|
|
9.5
|
|
|
|
—
|
|
(1)
|
For the period subsequent to the issuance of the Series A Preferred Units through December 31, 2016, the initial quarterly cash distribution was calculated as the minimum quarterly distribution of $0.3134 per unit prorated for the portion of the quarter subsequent to the issuance of the Series A Preferred Units.
|
Basic and diluted net income per limited partner unit for the three and six months ended June 30, 2017 are as follows:
|
|
Common
Units
|
|
|
Subordinated
Units
|
|
|
Series A
Preferred
Units
|
|
|
General
Partner
(including
IDRs)
|
|
|
Total
|
|
(millions, except for weighted average units and per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General partner allocation
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(4.0
|
)
|
|
$
|
(4.0
|
)
|
Preferred unitholder allocation
|
|
|
—
|
|
|
|
—
|
|
|
|
9.5
|
|
|
|
—
|
|
|
|
9.5
|
|
Distributions declared
|
|
|
19.4
|
|
|
|
9.2
|
|
|
|
—
|
|
|
|
4.3
|
|
|
|
32.9
|
|
Undistributed earnings
|
|
|
2.4
|
|
|
|
1.2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3.6
|
|
Net income attributable to partners (basic)
|
|
$
|
21.8
|
|
|
$
|
10.4
|
|
|
$
|
9.5
|
|
|
$
|
0.3
|
|
|
$
|
42.0
|
|
Dilutive effect of Series A Preferred Units
(1)
|
|
|
8.6
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to partners (diluted)
|
|
|
30.4
|
|
|
|
10.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average units outstanding (basic)
|
|
|
67,241,212
|
|
|
|
31,972,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of Series A Preferred Units
(1)
|
|
|
30,308,342
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average units outstanding (diluted)
|
|
|
97,549,554
|
|
|
|
31,972,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per limited partner unit (basic)
|
|
$
|
0.33
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per limited partner unit (diluted)
|
|
$
|
0.31
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General partner allocation
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(4.2
|
)
|
|
$
|
(4.2
|
)
|
Preferred unitholder allocation
|
|
|
—
|
|
|
|
—
|
|
|
|
19.0
|
|
|
|
—
|
|
|
|
19.0
|
|
Distributions declared
|
|
|
37.8
|
|
|
|
18.0
|
|
|
|
—
|
|
|
|
7.2
|
|
|
|
63.0
|
|
Undistributed earnings
|
|
|
11.1
|
|
|
|
5.3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16.4
|
|
Net income attributable to partners (basic)
|
|
$
|
48.9
|
|
|
$
|
23.3
|
|
|
$
|
19.0
|
|
|
$
|
3.0
|
|
|
$
|
94.2
|
|
Dilutive effect of Series A Preferred Units
(1)
|
|
|
16.0
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to partners (diluted)
|
|
|
64.9
|
|
|
|
23.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average units outstanding (basic)
|
|
|
67,240,499
|
|
|
|
31,972,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of Series A Preferred Units
(1)
|
|
|
30,308,342
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average units outstanding (diluted)
|
|
|
97,548,841
|
|
|
|
31,972,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per limited partner unit (basic)
|
|
$
|
0.73
|
|
|
$
|
0.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per limited partner unit (diluted)
|
|
$
|
0.67
|
|
|
$
|
0.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The dilutive effect of the Series A Preferred Units represents the reallocation of net income to limited partners including a reallocation of IDRs pursuant to the partnership agreement assuming conversion of the Series A Preferred Units into common units at the beginning of the period.
|
16
Basic and diluted net income per limited partner unit for the three and six months ended June 30, 2016 are as
follows:
|
|
Common
Units
|
|
|
Subordinated
Units
|
|
|
General
Partner
(including
IDRs)
|
|
|
Total
|
|
(millions, except for weighted average units and per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General partner allocation
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.1
|
)
|
|
$
|
(0.1
|
)
|
Distributions declared
|
|
|
10.7
|
|
|
|
7.6
|
|
|
|
0.7
|
|
|
|
19.0
|
|
Undistributed earnings
|
|
|
2.2
|
|
|
|
1.4
|
|
|
|
—
|
|
|
|
3.6
|
|
Net income attributable to partners (basic and diluted)
|
|
$
|
12.9
|
|
|
$
|
9.0
|
|
|
$
|
0.6
|
|
|
$
|
22.5
|
|
Weighted average units outstanding
|
|
|
45,722,371
|
|
|
|
31,972,789
|
|
|
|
|
|
|
|
|
|
Net income per limited partner unit (basic and diluted)
|
|
$
|
0.28
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General partner allocation
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.1
|
)
|
|
$
|
(0.1
|
)
|
Distributions declared
|
|
|
21.0
|
|
|
|
14.7
|
|
|
|
1.1
|
|
|
|
36.8
|
|
Undistributed earnings
|
|
|
5.3
|
|
|
|
3.6
|
|
|
|
—
|
|
|
|
8.9
|
|
Net income attributable to partners (basic and diluted)
|
|
$
|
26.3
|
|
|
$
|
18.3
|
|
|
$
|
1.0
|
|
|
$
|
45.6
|
|
Weighted average units outstanding
|
|
|
45,722,242
|
|
|
|
31,972,789
|
|
|
|
|
|
|
|
|
|
Net income per limited partner unit (basic and diluted)
|
|
$
|
0.57
|
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
Note 5. Unit Activity
Activity in number of units was as follows:
|
|
Convertible Preferred
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
|
|
|
Dominion Energy
|
|
|
Public
|
|
|
Dominion Energy
|
|
|
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 Energy purchase of
common units
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
(489,457
|
)
|
|
|
489,457
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance at June 30, 2016
|
|
|
—
|
|
|
|
—
|
|
|
|
27,386,242
|
|
|
|
18,336,129
|
|
|
|
31,972,789
|
|
|
|
—
|
|
|
|
77,695,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
18,942,714
|
|
|
|
11,365,628
|
|
|
|
48,734,195
|
|
|
|
18,504,628
|
|
|
|
31,972,789
|
|
|
|
—
|
|
|
|
129,519,954
|
|
Unit-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
10,444
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,444
|
|
Balance at June 30, 2017
|
|
|
18,942,714
|
|
|
|
11,365,628
|
|
|
|
48,744,639
|
|
|
|
18,504,628
|
|
|
|
31,972,789
|
|
|
|
—
|
|
|
|
129,530,398
|
|
(1)
|
These units were purchased by Dominion Energy as part of Dominion Energy's program initiated in September 2015, which expired in September 2016, to purchase from the market up to $50.0 million of common units representing limited partner interests in Dominion Energy Midstream at the discretion of Dominion Energy's management.
|
Note 6. Operating Revenue
Dominion Energy Midstream's operating revenue consists of the following:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas transportation and storage
|
|
$
|
112.3
|
|
|
$
|
81.6
|
|
|
$
|
236.9
|
|
|
$
|
160.7
|
|
Regulated gas sales
|
|
|
0.2
|
|
|
|
—
|
|
|
|
0.5
|
|
|
|
—
|
|
Other
|
|
|
3.2
|
|
|
|
4.0
|
|
|
|
8.5
|
|
|
|
7.9
|
|
Total operating revenue
|
|
$
|
115.7
|
|
|
$
|
85.6
|
|
|
$
|
245.9
|
|
|
$
|
168.6
|
|
17
Note 7. 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 Dominion Energy Midstream's own nonperformance risk on its 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 Energy Midstream applies fair value measurements to assets and liabilities associated with interest rate derivative instruments in accordance with the requirements discussed above. Credit adjustments are not considered material to the interest rate derivative fair values.
Inputs and Assumptions
Dominion Energy Midstream maximizes the use of observable inputs and minimizes 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, Dominion Energy Midstream considers 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 Dominion Energy Midstream believes that observable pricing is not indicative of fair value, judgment is required to develop the estimates of fair value. In those cases, Dominion Energy Midstream must estimate prices based on available historical and near-term future price information that reflect its market assumptions.
The inputs and assumptions used in measuring fair value for interest rate derivative contracts include the following:
|
•
|
Credit quality of counterparties and Dominion Energy Midstream
|
Levels
Dominion Energy Midstream also utilizes 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 it has the ability to access at the measurement date.
|
|
•
|
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 include interest rate swaps.
|
|
•
|
Level 3-Unobservable inputs for the asset or liability, including situations where there is little, if any, market activity for the asset or liability.
|
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.
18
For derivative contr
acts, Dominion Energy Midstream recognizes 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 class
ified as Level 3 for which the inputs became observable for classification in either Level 1 or Level 2.
Dominion Energy Midstream did not have any Level 3 derivative contracts as of June 30, 2017.
Recurring Fair Value Measurements
Fair value measurements are separately disclosed by level within the fair value hierarchy. The following table presents Dominion Energy Midstream's assets and liabilities that are measured at fair value on a recurring basis for each hierarchy level, including both current and noncurrent portions. There were no assets or liabilities measured at fair value at December 31, 2016.
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivative
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
Total assets
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivative
|
|
$
|
—
|
|
|
$
|
1.0
|
|
|
$
|
—
|
|
|
$
|
1.0
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
1.0
|
|
|
$
|
—
|
|
|
$
|
1.0
|
|
Fair Value of Financial Instruments
Substantially all of Dominion Energy Midstream's 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, customer and other receivables, affiliated receivables, Dominion Energy credit facility borrowings, payables to affiliates and accounts payable are representative of fair value because of the short-term nature of these instruments. For Dominion Energy Midstream's financial instruments that are not recorded at fair value, the carrying amounts and estimated fair values are as follows:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair
Value
(1)
|
|
|
Carrying
Amount
|
|
|
Estimated Fair
Value
(1)
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including securities due within one year
(2)
|
|
$
|
730.0
|
|
|
$
|
752.9
|
|
|
$
|
729.9
|
|
|
$
|
744.8
|
|
(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.
|
Note 8. Derivatives and Hedge Accounting Activities
Dominion Energy Midstream is exposed to the impact of market fluctuations in interest rate risks of its business operations. Dominion Energy Midstream uses derivative instruments to manage exposure to this risk, and has designated all of its derivative instruments as cash flow hedges for accounting purposes. See Note 7 for further information about fair value measurements and associated valuation methods for derivatives.
Derivative assets and liabilities are presented gross on Dominion Energy Midstream's Consolidated Balance Sheets. Dominion Energy Midstream's derivative contracts include over-the-counter transactions. Over-the-counter contracts are bilateral contracts that are transacted directly with a third party. Certain over-the-counter contracts contain contractual rights of setoff through master netting arrangements, derivative clearing agreements, and contract default provisions. In addition, the contracts are subject to conditional rights of setoff through counterparty nonperformance, insolvency, or other conditions.
19
Balance Sheet Presentation
The tables below present Dominion Energy Midstream's derivative asset and liability balances by type of financial instrument, before and after the effects of offsetting. There were no derivative asset or liability balances at December 31, 2016.
|
|
June 30, 2017
|
|
|
|
Gross
Amounts
of Recognized
Assets
|
|
|
Gross
Amounts
Offset in the
Consolidated
Balance Sheet
|
|
|
Net Amounts
of Assets
Presented
in the
Consolidated
Balance Sheet
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Over-the-counter
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
Total derivatives, subject to a master netting or similar arrangement
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset
in the Consolidated
Balance Sheet
|
|
|
|
|
|
|
|
Net Amounts
of Assets
Presented in the Consolidated
Balance Sheet
|
|
|
Financial
Instruments
|
|
|
Cash
Collateral
Received
|
|
|
Net Amounts
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over-the-counter
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
June 30, 2017
|
|
|
|
Gross
Amounts
of Recognized
Liabilities
|
|
|
Gross
Amounts
Offset in the
Consolidated
Balance Sheet
|
|
|
Net Amounts
of Liabilities
Presented in
the
Consolidated
Balance Sheet
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Over-the-counter
|
|
$
|
1.0
|
|
|
$
|
—
|
|
|
$
|
1.0
|
|
Total derivatives, subject to a master netting or similar arrangement
|
|
$
|
1.0
|
|
|
$
|
—
|
|
|
$
|
1.0
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset
in the Consolidated
Balance Sheet
|
|
|
|
|
|
|
|
Net Amounts
of Liabilities
Presented in the Consolidated
Balance Sheet
|
|
|
Financial
Instruments
|
|
|
Cash
Collateral
Paid
|
|
|
Net Amounts
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over-the-counter
|
|
$
|
1.0
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
0.9
|
|
Total
|
|
$
|
1.0
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
0.9
|
|
20
Volumes
The following table presents the volume of Dominion Energy Midstream’s derivative activity at June 30, 2017. These volumes are based on open derivative positions and represent the combined absolute value of their long and short positions, except in the case of offsetting transactions, for which they represent the absolute value of the net volume of their long and short positions.
|
|
Current
|
|
|
Noncurrent
|
|
Interest rate
(1)
|
|
$
|
—
|
|
|
$
|
300,000,000
|
|
(1)
|
Maturity is determined based on final settlement period.
|
Ineffectiveness and AOCI
For the three and six months ended June 30, 2017, there were no gains or losses on hedging instruments determined to be ineffective.
The following table presents selected information related to gains (losses) on cash flow hedges included in AOCI in Dominion Energy Midstream's Consolidated Balance Sheet at June 30, 2017:
|
|
AOCI
|
|
|
Amounts Expected
to be Reclassified
to Earnings
During the
Next 12 Months
|
|
|
Maximum
Term
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
Interest rate
|
|
$
|
(0.9
|
)
|
|
$
|
(1.0
|
)
|
|
29 months
|
Total
|
|
$
|
(0.9
|
)
|
|
$
|
(1.0
|
)
|
|
|
The amounts that will be reclassified from AOCI to earnings will generally be offset by the recognition of the hedged transactions (e.g., interest payments) in earnings, thereby achieving the realization of prices contemplated by the underlying risk management strategies and will vary from the expected amounts presented above as a result of changes in interest rates.
Fair Value and Gains and Losses on Derivative Instruments
The following tables present the fair values of Dominion Energy Midstream's derivatives and where they are presented in its Consolidated Balance Sheets. Dominion Energy Midstream did not have any derivatives at December 31, 2016.
|
|
Fair Value –
Derivatives under
Hedge Accounting
|
|
|
Total Fair
Value
|
|
(millions)
|
|
|
|
|
|
|
|
|
At June 30, 2017
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Noncurrent Assets
|
|
|
|
|
|
|
|
|
Interest rate
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Total noncurrent derivative assets
(1)
|
|
|
0.1
|
|
|
|
0.1
|
|
Total derivative assets
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Interest rate
|
|
$
|
1.0
|
|
|
$
|
1.0
|
|
Total current derivative liabilities
(2)
|
|
|
1.0
|
|
|
|
1.0
|
|
Total derivative liabilities
|
|
$
|
1.0
|
|
|
$
|
1.0
|
|
(1)
|
Noncurrent derivative assets are presented in other deferred charges and other assets in Dominion Energy Midstream's Consolidated Balance Sheets.
|
(2)
|
Current derivative liabilities are presented in other current liabilities in Dominion Energy Midstream's Consolidated Balance Sheets.
|
21
The following tables present the gains and losses on Dominion Energy Midstream's derivatives, as well as where the associa
ted activity is presented in its Consolidated Balance Sheets and Statements of Income. Dominion Energy Midstream did not have any derivatives during the three and six months ended June 30, 2016.
Derivatives in Cash Flow Hedging Relationships
|
|
Amount of Gain
(Loss) Recognized
in AOCI on
Derivatives
(Effective
Portion)
(1)
|
|
|
Amount of
Gain (Loss)
Reclassified
From AOCI
to Income
|
|
(millions)
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
Derivative type and location of gains (losses):
|
|
|
|
|
|
|
|
|
Interest rate
(2)
|
|
$
|
(1.0
|
)
|
|
$
|
(0.6
|
)
|
Total
|
|
$
|
(1.0
|
)
|
|
$
|
(0.6
|
)
|
Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
Derivative type and location of gains (losses):
|
|
|
|
|
|
|
|
|
Interest rate
(2)
|
|
$
|
(1.5
|
)
|
|
$
|
(0.6
|
)
|
Total
|
|
$
|
(1.5
|
)
|
|
$
|
(0.6
|
)
|
(1)
|
Amounts deferred into AOCI have no associated effect in Dominion Energy Midstream's Consolidated Statements of Income.
|
(2)
|
Amounts recorded in Dominion Energy Midstream's Consolidated Statements of Income are classified in interest and related charges.
|
Note 9. Equity Method Investments
Dominion Energy Midstream uses the equity method to account for its 25.93% noncontrolling partnership interest in Iroquois and its 50% noncontrolling partnership interest in White River Hub. See further discussion of Iroquois and White River Hub in Note 8 to the Consolidated Financial Statements in Dominion Energy Midstream’s Annual Report on Form 10-K for the year ended December 31, 2016.
The table below summarizes distributions received and income earned from Dominion Energy Midstream's equity method investees for the three and six months ended June 30, 2017 and 2016.
(in millions)
|
|
Iroquois
|
|
|
White River Hub
|
|
|
Iroquois
|
|
|
White River Hub
|
|
Period Ended June 30, 2017
|
|
Three Months
|
|
|
Six Months
|
|
Distributions received
|
|
$
|
5.9
|
|
|
$
|
1.1
|
|
|
$
|
11.7
|
|
|
$
|
2.3
|
|
Income from equity method investees
|
|
|
4.3
|
|
|
|
0.9
|
|
|
|
11.4
|
|
|
|
1.8
|
|
Period Ended June 30, 2016
|
|
|
|
|
|
|
Distributions received
|
|
$
|
5.9
|
|
|
|
|
|
|
$
|
11.7
|
|
|
|
|
|
Income from equity method investees
|
|
|
3.7
|
|
|
|
|
|
|
|
10.1
|
|
|
|
|
|
The table below summarizes the carrying amount of the investments and excess of investment over Dominion Energy Midstream's share of underlying equity in net assets at June 30, 2017 and December 31, 2016.
(in millions)
|
|
Iroquois
|
|
|
White River Hub
|
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Carrying amount of investment
|
|
$
|
218.4
|
|
|
$
|
218.7
|
|
|
$
|
38.6
|
|
|
$
|
39.1
|
|
Excess of investment over Dominion Energy Midstream's share of underlying equity in net assets
(1)
|
|
|
122.9
|
|
|
|
122.9
|
|
|
|
16.1
|
|
|
|
16.1
|
|
(1)
|
The difference between the carrying value of Dominion Energy Midstream's equity method investments and its share in the underlying equity in net assets reflects equity method goodwill and is not being amortized.
|
Summarized financial information provided to us by Iroquois for 100% of Iroquois for the three and six months ended June 30, 2017 and 2016 is presented below.
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
44.7
|
|
|
$
|
46.7
|
|
|
$
|
98.0
|
|
|
$
|
99.7
|
|
Operating income
|
|
|
23.9
|
|
|
|
22.4
|
|
|
|
55.8
|
|
|
|
51.2
|
|
Net income
|
|
|
19.8
|
|
|
|
18.1
|
|
|
|
46.3
|
|
|
|
42.7
|
|
22
Summarized financial information provided to us by White River Hub for 100% of White River Hub for the three and six months ended June 30, 2017 is presented below.
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
(in millions)
|
|
June 30, 2017
|
|
|
June 30, 2017
|
|
Revenues
|
|
$
|
2.5
|
|
|
$
|
5.1
|
|
Operating income
|
|
|
1.8
|
|
|
|
3.6
|
|
Net income
|
|
|
1.8
|
|
|
|
3.6
|
|
Note 10. Regulatory Assets and Liabilities
Regulatory assets and liabilities include the following:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
(millions)
|
|
|
|
|
|
|
|
|
Regulatory assets:
|
|
|
|
|
|
|
|
|
Unrecovered gas costs
(1)
|
|
$
|
3.6
|
|
|
$
|
3.3
|
|
Interest rate hedges
(2)
|
|
|
0.6
|
|
|
|
0.6
|
|
Other
|
|
|
0.6
|
|
|
|
1.2
|
|
Regulatory assets-current
(3)
|
|
|
4.8
|
|
|
|
5.1
|
|
Income taxes recoverable through future rates
(4)
|
|
|
4.4
|
|
|
|
3.6
|
|
Interest rate hedges
(2)
|
|
|
33.7
|
|
|
|
34.0
|
|
Cost of reacquired debt
(5)
|
|
|
1.3
|
|
|
|
1.5
|
|
Other
|
|
|
1.5
|
|
|
|
1.1
|
|
Regulatory assets-noncurrent
(6)
|
|
|
40.9
|
|
|
|
40.2
|
|
Total regulatory assets
|
|
$
|
45.7
|
|
|
$
|
45.3
|
|
Regulatory liabilities:
|
|
|
|
|
|
|
|
|
Overrecovered gas costs
(1)
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
LNG cargo obligations
(7)
|
|
|
2.5
|
|
|
|
3.2
|
|
Customer bankruptcy settlement
(8)
|
|
|
2.8
|
|
|
|
2.8
|
|
Other
|
|
|
1.5
|
|
|
|
1.1
|
|
Regulatory liabilities-current
(9)
|
|
|
7.2
|
|
|
|
7.5
|
|
Provision for future cost of removal and AROs
(10)
|
|
|
102.4
|
|
|
|
100.0
|
|
Unrecognized other postretirement benefit costs
(11)
|
|
|
12.4
|
|
|
|
11.1
|
|
Customer bankruptcy settlement
(8)
|
|
|
16.2
|
|
|
|
17.6
|
|
Other
|
|
|
0.8
|
|
|
|
0.4
|
|
Regulatory liabilities-noncurrent
|
|
|
131.8
|
|
|
|
129.1
|
|
Total regulatory liabilities
|
|
$
|
139.0
|
|
|
$
|
136.6
|
|
(1)
|
Reflects unrecovered/overrecovered gas costs, which are subject to annual filings with FERC.
|
(2)
|
Reflects interest rate cash flow hedges recoverable from customers. Dominion Energy Questar Pipeline entered into forward starting swaps totaling $150.0 million in the second and third quarters of 2011 in anticipation of issuing $180.0 million of notes in December 2011. Settlement of these swaps required payments of $37.3 million in the fourth quarter of 2011 because of declines in interest rates. These swaps qualified as cash flow hedges and the settlement payments are being amortized to interest expense over the 30-year life of the debt.
|
(3)
|
Current regulatory assets are presented in other current assets in Dominion Energy Midstream’s Consolidated Balance Sheets.
|
(4)
|
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.
|
(5)
|
Represents charges incurred on the reacquisition of debt by Dominion Energy Questar Pipeline that are deferred and amortized as interest expense over the would-be remaining life of the reacquired debt. The reacquired debt costs had a weighted-average life of approximately 3.5 years at June 30, 2017.
|
(6)
|
Noncurrent regulatory assets are presented in other deferred charges and other assets in Dominion Energy Midstream’s Consolidated Balance Sheets.
|
(7)
|
Reflects obligations to the Import Shippers for LNG cargo received. See Note 12 to the Consolidated Financial Statements in Dominion Energy Midstream's Annual Report on Form 10-K for the year ended December 31, 2016 for further information.
|
(8)
|
Represents the balance of proceeds from the monetization of a bankruptcy claim acquired as part of the DECG Acquisition, which is being amortized into operating revenue through February 2024.
|
(9)
|
Current regulatory liabilities are presented in other current liabilities in Dominion Energy Midstream’s Consolidated Balance Sheets.
|
(10)
|
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.
|
(11)
|
Reflects a regulatory liability for the collection of postretirement benefit costs allowed in rates in excess of expenses incurred at Dominion Energy Questar Pipeline
.
|
23
At June 30, 2017, approximately $40.8 million of regulat
ory assets represented past expenditures on which Dominion Energy Midstream does not currently earn a return. With the exception of regulatory assets related to interest rate hedges and reacquired debt, these expenditures are expected to be recovered withi
n two years
.
Note 11. 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, DECG and Dominion Energy Questar Pipeline. FERC also has jurisdiction over siting, construction and operation of natural gas import and export facilities and interstate natural gas pipeline facilities.
Other than the matter discussed below, there have been no significant developments regarding the pending regulatory matters disclosed in Note 12 to the Consolidated Financial Statements in Dominion Energy Midstream’s Annual Report on Form 10-K for the year ended December 31, 2016.
In July 2017, Cove Point submitted an application for a temporary operating permit to the Maryland Department of the Environment, as required prior to the date of first production of LNG for commercial purposes of exporting LNG. This case is pending.
Note 12. Variable Interest Entities
There have been no significant changes regarding the entities Dominion Energy Midstream considers VIEs as described in Note 14 to the Consolidated Financial Statements in Dominion Energy Midstream's Annual Report on Form 10-K for the year ended December 31, 2016.
Dominion Energy Midstream reimburses its general partner and affiliates for the costs of providing administrative, management and other services necessary for its operations. For the three and six months ended June 30, 2017, these costs were $0.5 million and $0.9 million, respectively. For the three and six months ended June 30, 2016, these costs were $0.3 million and $0.6 million, respectively.
In addition to the services purchased by our general partner, Dominion Energy Midstream purchased shared services from DES, DECGS and DEQPS of approximately $6.7 million, $3.7 million and $10.8 million for the three months ended June 30, 2017, respectively, and $13.6 million, $6.9 million and $17.7 million for the six months ended June 30, 2017, respectively. Dominion Energy Midstream purchased shared services from DES and DECGS of approximately $5.8 million and $3.9 million for the three months ended June 30, 2016, respectively, and $12.5 million and $8.9 million for the six months ended June 30, 2016, respectively. The Consolidated Balance Sheets at June 30, 2017 and December 31, 2016 include amounts due from Dominion Energy Midstream to DES, DECGS and DEQPS of approximately $5.4 million and $6.3 million, respectively. The Consolidated Balance Sheet at June 30, 2017 includes amounts due to Dominion Energy Midstream from DES and DEQPS of $0.7 million. There were no such amounts due to Dominion Energy Midstream at December 31, 2016.
Note 13. Commitments and
Contingencies
As a result of issues generated in the ordinary course of business, Dominion Energy 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 Energy Midstream to estimate a range of possible loss. For such matters that Dominion Energy 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 Energy Midstream is able to estimate a range of possible loss. For legal proceedings and governmental examinations for which Dominion Energy 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 Energy Midstream’s 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 Energy Midstream’s financial position, liquidity or results of operations.
24
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 June 30, 2017, Dominion Energy Midstream had purchased $12.4 million of surety bonds, including $9.8 million held by Cove Point. Under the terms of surety bonds, Dominion Energy Midstream is obligated to indemnify the respective surety bond company for any amounts paid.
Note 14. 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 Energy Midstream provides service to approximately 140 customers, including the Storage Customers, marketers or end users, power generators, utilities and the Import Shippers. The two largest customers comprised approximately 29% of the total transportation and storage revenues for the three months ended June 30, 2017, with Dominion Energy Midstream’s largest customer, an affiliate, representing approximately 16% of such amount during the period. The three largest customers comprised approximately 41% of the total transportation and storage revenues for the six months ended June 30, 2017, with Dominion Energy Midstream's largest customer, an affiliate, representing approximately 17% of such amount during the period. The two largest customers comprised approximately 69% and 71% of the total transportation and storage revenues for the three and six months ended June 30, 2016, respectively, with Dominion Energy Midstream's largest customer representing approximately 54% and 55% of such amounts in each period, respectively.
Dominion Energy Midstream maintains a provision for credit losses based on factors surrounding the credit risk of its customers, historical trends and other information. At June 30, 2017 and December 31, 2016, the provision for credit losses was less than $0.1 million. Management believes, based on credit policies and the June 30, 2017 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 15. Related-Party Transactions
Dominion Energy Midstream engages in related-party transactions primarily with other Dominion Energy subsidiaries (affiliates), including our general partner. Dominion Energy Midstream's 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 Dominion Energy benefit plans as described in Note 16 to the Consolidated Financial Statements in Dominion Energy Midstream's Annual Report on Form 10-K for the year ended December 31, 2016. In Dominion Energy Midstream's Consolidated Balance Sheets at June 30, 2017 and December 31, 2016, amounts due to Dominion Energy associated with these benefit plans included in other deferred credits and other liabilities were $7.2 million and $6.2 million, respectively, and amounts due from Dominion Energy at June 30, 2017 and December 31, 2016 included in other deferred charges and other assets were $1.6 million and $0.9 million, respectively. In connection with the DECG Acquisition, for the six months ended June 30, 2016 total 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 Energy, and Dominion Energy Midstream subsequently reimbursed Dominion Energy. There were no such costs incurred during the three months ended June 30, 2016. Transactions related to the Dominion Energy Questar Pipeline Acquisition are described in Note 2. A discussion of the remaining significant related party transactions follows.
Transactions with Affiliates
DES provides accounting, legal, finance and certain administrative and technical services to Dominion Energy Midstream, and DECGS and DEQPS provide human resources and operations services to Dominion Energy Midstream. Refer to Note 12 for further information.
25
For the three and six months ended June 30, 2016, DECG reimbursed Dominion Energy a total of $0.6 million for costs incurred related to Dominion Energy's transition services agreement with SCANA to provide administrative funct
ions related to DECG. No such costs were incurred for the three and six months ended June 30, 2017.
Dominion Energy Midstream provides transportation and other services to affiliates and affiliates provide goods and services to Dominion Energy Midstream.
Affiliated transactions are presented below:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of natural gas transportation services to affiliates
|
|
$
|
19.0
|
|
|
$
|
0.4
|
|
|
$
|
41.6
|
|
|
$
|
0.9
|
|
Services provided to affiliates
|
|
|
0.3
|
|
|
|
—
|
|
|
|
0.9
|
|
|
|
—
|
|
Purchased gas from affiliates
|
|
|
1.3
|
|
|
|
—
|
|
|
|
3.8
|
|
|
|
0.1
|
|
Goods and services provided by affiliates to Dominion Energy Midstream
(1)
|
|
|
26.3
|
|
|
|
11.5
|
|
|
|
48.8
|
|
|
|
24.8
|
|
(1)
|
Includes $9.4 million and $16.3 million of capitalized expenditures for the three and six months ended June 30, 2017, respectively and $4.5 million and $8.4 million for the three and six months ended June 30, 2016, respectively
.
|
Dominion Energy Credit Facility
In connection with the Offering, Dominion Energy Midstream entered into a credit facility with Dominion Energy with a borrowing capacity of $300.0 million. A summary of certain key terms of the credit facility with Dominion Energy is included in Note 20 to the Consolidated Financial Statements in Dominion Energy Midstream's Annual Report on Form 10-K for the year ended December 31, 2016. At June 30, 2017 and December 31, 2016, $63.0 million and $63.2 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 Energy Midstream's borrowings against the facility were $0.4 million and $0.8 million for the three and six months ended June 30, 2017, respectively, and $0.1 million for the three and six months ended June 30, 2016.
Affiliated Long-Term Debt
As a condition to closing under the Dominion Energy Questar Pipeline Contribution Agreement, in December 2016 Dominion Energy Midstream repaid a two-year, $300.8 million senior unsecured promissory note payable to Dominion Energy, which was issued in connection with the DECG Acquisition. Interest charges related to Dominion Energy Midstream's borrowing from Dominion Energy were $0.4 million and $0.9 million for the three and six months ended June 30, 2016, respectively.
Natural Gas Imbalances
Dominion Energy Midstream maintains natural gas imbalances with affiliates. The imbalances with affiliates are provided below:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
(millions)
|
|
|
|
|
|
|
|
|
Imbalances payable to affiliates
(1)
|
|
$
|
1.2
|
|
|
$
|
0.1
|
|
Imbalances receivable from affiliates
(2)
|
|
|
1.0
|
|
|
|
6.3
|
|
(1)
|
Recorded in other current liabilities in the Consolidated Balance Sheets.
|
(2)
|
Recorded in other current assets in the Consolidated Balance Sheets.
|
Right of First Offer
In connection with the Offering, Dominion Energy Midstream entered into a right of first offer agreement with Dominion Energy as described in Note 20 to the Consolidated Financial Statements in Dominion Energy Midstream's Annual Report on Form 10-K for the year ended December 31, 2016. There have been no changes to this agreement.
26
Contributions from Dominion Energy
For the three and six months ended June 30, 2017, Dominion Energy contributed $134.4 million and $463.6 million, respectively, to Cove Point. For the three and six months ended June 30, 2016, Dominion Energy contributed $293.7 million and $538.6 million, respectively, to Cove Point. In July 2017, Dominion Energy contributed an additional $40.4 million to Cove Point. These contributions from Dominion Energy to Cove Point represent funding for capital expenditures primarily related to the Liquefaction Project.
For the three and six months ended June 30, 2017, Dominion Energy allocated costs of $4.0 million and $4.2 million, respectively, to Dominion Energy Midstream related to the Dominion Energy Questar Pipeline Acquisition for which Dominion Energy did not seek reimbursement. For the three months ended June 30, 2016, Dominion Energy allocated costs of $0.1 million to Dominion Energy Midstream related to the Dominion Energy Questar Pipeline Acquisition for which Dominion Energy did not seek reimbursement.
Note 16. Income Taxes
Dominion Energy 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 unitholder’s respective share of Dominion Energy Midstream’s items of taxable income, gain, loss and deduction in the preparation of income tax returns. Accordingly, Dominion Energy Midstream's Consolidated Financial Statements do not include income taxes for the periods presented.
See Note 21 to the Consolidated Financial Statements in Dominion Energy Midstream's Annual Report on Form 10-K for the year ended December 31, 2016 for additional information.
Note 17. Operating Segment
Dominion Energy Midstream is organized primarily on the basis of products and services sold in the U.S. Dominion Energy Midstream’s operating segment, Gas Infrastructure (previously named Dominion Energy), consists of gas transportation, LNG import and storage.
Dominion Energy Midstream also reports a Corporate and Other segment. The Corporate and Other segment primarily includes items attributable to Dominion Energy Midstream's operating segment that are not included in profit measures evaluated by executive management in assessing the segment's performance or in allocating resources.
The following table presents segment information pertaining to Dominion Energy Midstream's operations:
|
|
Gas Infrastructure
|
|
|
Corporate and
Other
|
|
|
Total
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
115.7
|
|
|
$
|
—
|
|
|
$
|
115.7
|
|
Earnings from equity method investees
|
|
|
5.2
|
|
|
|
—
|
|
|
|
5.2
|
|
Net income (loss) including noncontrolling interest and predecessors
|
|
|
35.6
|
|
|
|
(4.0
|
)
|
|
|
31.6
|
|
Net income (loss) attributable to partners
|
|
|
46.0
|
|
|
|
(4.0
|
)
|
|
|
42.0
|
|
Three Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
85.6
|
|
|
$
|
—
|
|
|
$
|
85.6
|
|
Earnings from equity method investees
|
|
|
3.7
|
|
|
|
—
|
|
|
|
3.7
|
|
Net income (loss) including noncontrolling interest and predecessors
|
|
|
53.2
|
|
|
|
(0.1
|
)
|
|
|
53.1
|
|
Net income (loss) attributable to partners
|
|
|
22.6
|
|
|
|
(0.1
|
)
|
|
|
22.5
|
|
Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
245.9
|
|
|
$
|
—
|
|
|
$
|
245.9
|
|
Earnings from equity method investees
|
|
|
13.2
|
|
|
|
—
|
|
|
|
13.2
|
|
Net income (loss) including noncontrolling interest and predecessors
|
|
|
90.1
|
|
|
|
(4.2
|
)
|
|
|
85.9
|
|
Net income (loss) attributable to partners
|
|
|
98.4
|
|
|
|
(4.2
|
)
|
|
|
94.2
|
|
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
168.6
|
|
|
$
|
—
|
|
|
$
|
168.6
|
|
Earnings from equity method investees
|
|
|
10.1
|
|
|
|
—
|
|
|
|
10.1
|
|
Net income (loss) including noncontrolling interest and predecessors
|
|
|
105.0
|
|
|
|
(0.1
|
)
|
|
|
104.9
|
|
Net income (loss) attributable to partners
|
|
|
45.7
|
|
|
|
(0.1
|
)
|
|
|
45.6
|
|
27