Dominion Energy Midstream is a Delaware limited partnership formed by Dominion MLP Holding Company, LLC and Dominion Energy Midstream GP, both indirect wholly-owned subsidiaries of Dominion Energy, to grow a portfolio of natural gas terminalling, 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, the Cove Point Pipeline and the Liquefaction Project, which commenced commercial operations in April 2018. 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. Dominion Energy Midstream also owns Dominion Energy Questar Pipeline, which owns and operates interstate natural gas pipelines and storage facilities in the western U.S., including a 50% noncontrolling partnership interest in White River Hub. Dominion Energy Questar Pipeline’s operations are primarily regulated by FERC.
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 16 to the Consolidated Financial Statements in Dominion Energy Midstream’s Annual Report on Form 10-K for the year ended December 31, 2017, 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 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 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.
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, 2017.
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 September 30, 2018, its results of operations for the three and nine months ended September 30, 2018 and 2017 and its cash flows and changes in equity and partners’ capital for the nine months ended September 30, 2018 and 2017. Such adjustments are normal and recurring in nature unless otherwise noted.
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 and other expenses and other factors.
Certain amounts in Dominion Energy Midstream's 2017 Consolidated Financial Statements and Notes have been reclassified as a result of the adoption of revised accounting guidance pertaining to restricted cash and equivalents and certain distributions from equity method investees. In addition, certain other amounts have been reclassified to conform to the 2018 presentation for comparative purposes; however, such reclassifications did not affect Dominion Energy Midstream’s net income, total assets, liabilities, equity and partners’ capital or cash flows.
The effects of the adoption of new accounting standards on the Consolidated Financial Statements are described below. There have been no other 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, 2017.
Operating revenue is recorded on the basis of services rendered, commodities delivered or contracts settled and includes amounts yet to be billed to customers. Dominion Energy Midstream is currently generating significant revenue and earnings from annual reservation payments under long-term regasification, firm peaking storage and firm transportation contracts. Straight-fixed-variable rate designs are used to allow for recovery of substantially all fixed costs in demand or reservation charges, thereby reducing the earnings impact of volume changes on gas transportation and storage operations. Customer and affiliated receivables include accrued unbilled revenue based on estimated amounts of services provided but not yet billed to customers.
Dominion Energy Midstream collects facility charges related to certain of its expansion projects, which are considered to be contract liabilities. These facility charges are amortized to revenue over the term of the related transportation contract once the related projects have been placed into service.
The primary types of sales and service activities reported as operating revenue for Dominion Energy Midstream, subsequent to the adoption of revised guidance for revenue recognition from contracts with customers, are as follows:
The primary types of sales and service activities reported as operating revenue for Dominion Energy Midstream, prior to the adoption of revised guidance for revenue recognition from contracts with customers, were as follows:
Dominion Energy Midstream typically receives or retains NGLs and natural gas from customers when providing natural gas processing, transportation or storage services. The revised guidance for revenue from contracts with customers requires entities to include the fair value of the noncash consideration in the transaction price. Therefore, subsequent to the adoption of the revised guidance for revenue recognition from contracts with customers, Dominion Energy Midstream records the fair value of NGLs received during natural gas processing as service revenue recognized over time, and continues to recognize revenue from the subsequent sale of the NGLs to customers upon delivery. Dominion Energy Midstream typically retains natural gas under certain transportation service arrangements that are intended to facilitate performance of the service and allow for natural losses that occur. As the intent of the allowance is to enable fulfillment of the contract rather than to provide compensation for services, the fuel allowance is not included in revenue.
Dominion Energy Midstream holds restricted cash balances that primarily consist of amounts held for certain customer deposits as allowed under FERC gas tariffs and a distribution reserve. In October 2016, Cove Point fully funded a distribution reserve of $25.0 million, sufficient to pay two quarters of Preferred Return Distributions. The distribution reserve was fully utilized to fund the quarterly Preferred Return Distributions paid in November 2017 and February 2018. Upon the adoption of revised accounting guidance in January 2018, restricted cash and equivalents are included within Dominion Energy Midstream’s Consolidated Statements of Cash Flows, with the change in balance no longer considered a separate investing activity. The retrospective application of this guidance had no impact to the nine months ended September 30, 2017. The following table provides a reconciliation of the total cash, restricted cash and equivalents reported within Dominion Energy Midstream’s Consolidated Balance Sheets to the corresponding amounts reported within Dominion Energy Midstream’s Consolidated Statements of Cash Flows:
Dominion Energy Midstream holds investments that are accounted for under the equity method of accounting. Effective January 2018, Dominion Energy Midstream classifies distributions from equity method investees as either cash flows from operating activities or cash flows from investing activities in the Consolidated Statements of Cash Flows according to the nature of the distribution. Distributions received are classified on the basis of the nature of the activity of the investees that generated the distribution as either a return on investment (classified as cash flows from operating activities) or a return of an investment (classified as cash flows from investing activities) when such information is available to Dominion Energy Midstream. Previously, distributions were determined to be either a return on investment or return of an investment based on a cumulative earnings approach whereby any distributions received in excess of earnings were considered to be a return of investment. Dominion Energy Midstream has applied this approach on a retrospective basis and has recast the Consolidated Statements of Cash Flows for the nine months ended September 30, 2017, accordingly. As previously reported, Dominion Energy Midstream’s net cash provided by operating activities and net cash used in investing activities for the nine months ended September 30, 2017 was $246.9 million and $727.7 million, respectively.
In May 2014, the Financial Accounting Standards Board issued revised accounting guidance for revenue recognition from contracts with customers. Dominion Energy Midstream adopted this revised accounting guidance for interim and annual reporting periods beginning January 1, 2018 using the modified retrospective method.
Note 3. 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 Energy Midstream, after deducting any distributions to Series A Preferred Units and incentive distributions, by the weighted average number of common and subordinated units outstanding. See Note 4 for information regarding the conversion of the subordinated units in May 2018. 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, 2017 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. Undistributed (distributions in excess of) earnings 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, 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. Basic and diluted earnings per unit applicable to subordinated limited partner units are the same because there are no potentially dilutive subordinated units outstanding.
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 in 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 nine months ended September 30, 2017 and 2018.
Note 4. Unit Activity
Activity in number of units was as follows:
|
|
Convertible Preferred
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
Public
|
|
|
Dominion Energy
|
|
|
Public
|
|
|
Dominion Energy
|
|
|
General Partner
|
|
|
Subordinated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Issuance of common units
|
|
|
—
|
|
|
|
—
|
|
|
|
14,724
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,724
|
|
Balance at September 30, 2017
|
|
|
18,942,714
|
|
|
|
11,365,628
|
|
|
|
48,759,363
|
|
|
|
18,504,628
|
|
|
|
—
|
|
|
|
31,972,789
|
|
|
|
129,545,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
18,942,714
|
|
|
|
11,365,628
|
|
|
|
49,318,899
|
|
|
|
18,504,628
|
|
|
|
—
|
|
|
|
31,972,789
|
|
|
|
130,104,658
|
|
Unit-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
10,424
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,424
|
|
Issuance of common units
|
|
|
—
|
|
|
|
—
|
|
|
|
125,819
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
125,819
|
|
IDR reset
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,675,082
|
|
|
|
—
|
|
|
|
26,675,082
|
|
Conversion of subordinated units
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31,972,789
|
|
|
|
—
|
|
|
|
(31,972,789
|
)
|
|
|
—
|
|
Balance at September 30, 2018
|
|
|
18,942,714
|
|
|
|
11,365,628
|
|
|
|
49,455,142
|
|
|
|
50,477,417
|
|
|
|
26,675,082
|
|
|
|
—
|
|
|
|
156,915,983
|
|
18
In O
ctober 2017, Dominion Energy Midstream issued 217,051 common units through its at-the-market program resulting in proceeds of $6.9 million, net of fees and commissions of $0.1 million.
IDR Reset
In June 2018, Dominion Energy Midstream GP notified Dominion Energy Midstream that it had made an IDR reset election as defined in the partnership agreement. Under the IDR reset election, the minimum quarterly distribution was increased from $0.1750 to $0.3340 and the levels at which the IDRs participate in distributions were reset at higher amounts based on the formula in the partnership agreement. In connection with the IDR reset election, Dominion Energy Midstream GP was issued 26.7 million common units.
Prior to the IDR reset election, Dominion Energy Midstream GP was entitled to incentive distributions if the amount distributed with respect to one quarter exceeded specified target levels shown below:
|
|
|
|
Marginal Percentage Interest in Distributions
|
|
|
Total Quarterly Distribution Per Unit
|
|
Unitholders
|
|
IDR Holders
|
Minimum Quarterly Distribution
|
|
$0.1750
|
|
100.0%
|
|
---%
|
First Target Distribution
|
|
above $0.1750 up to $0.2013
|
|
100.0%
|
|
---%
|
Second Target Distribution
|
|
above $0.2013 up to $0.2188
|
|
85.0%
|
|
15.0%
|
Third Target Distribution
|
|
above $0.2188 up to $0.2625
|
|
75.0%
|
|
25.0%
|
Thereafter
|
|
above $0.2625
|
|
50.0%
|
|
50.0%
|
Subsequent to the IDR reset election, Dominion Energy Midstream GP is entitled to incentive distributions if the amount distributed with respect to one quarter exceeds specified target levels shown below:
|
|
|
|
Marginal Percentage Interest in Distributions
|
|
|
Total Quarterly Distribution Per Unit
|
|
Unitholders
|
|
IDR Holders
|
Minimum Quarterly Distribution
|
|
$0.3340
|
|
100.0%
|
|
---%
|
First Target Distribution
|
|
above $0.3340 up to $0.3841
|
|
100.0%
|
|
---%
|
Second Target Distribution
|
|
above $0.3841 up to $0.4175
|
|
85.0%
|
|
15.0%
|
Third Target Distribution
|
|
above $0.4175 up to $0.5010
|
|
75.0%
|
|
25.0%
|
Thereafter
|
|
above $0.5010
|
|
50.0%
|
|
50.0%
|
Conversion of Subordinated Units
In May 2018, all of the subordinated units converted into common units on a 1:1 ratio following the payment of the distribution for the first quarter of 2018. The converted units participate pro rata with the other common units in quarterly distributions. The conversion of the subordinated units will not impact the amount of distributions paid by Dominion Energy Midstream or the total number of outstanding units. The allocation of net income and distributions during the period were effected in accordance with terms of the partnership agreement.
Note 5. Operating Revenue
Dominion Energy Midstream's operating revenue, subsequent to the adoption of revised guidance for revenue recognition from contracts with customers, consists of the following:
|
|
Three Months Ended
September 30, 2018
|
|
|
Nine Months Ended
September 30, 2018
|
|
(millions)
|
|
|
|
|
|
|
|
|
Regulated gas transportation and storage sales
(1)
|
|
$
|
119.4
|
|
|
$
|
337.4
|
|
Nonregulated gas transportation and storage sales
|
|
|
162.2
|
|
|
|
286.2
|
|
Other revenue
(1)
|
|
|
1.8
|
|
|
|
16.0
|
|
Total operating revenue from contracts with customers
|
|
|
283.4
|
|
|
|
639.6
|
|
Other revenue
(1)
|
|
|
0.8
|
|
|
|
2.3
|
|
Total operating revenue
|
|
$
|
284.2
|
|
|
$
|
641.9
|
|
(1)
|
See Note 16 for amounts attributable to affiliates.
|
The table below discloses the aggregate amount of the transaction price allocated to fixed-price performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period and when Dominion Energy Midstream expects to recognize this revenue. These revenues relate to contracts containing fixed prices where Dominion Energy Midstream will earn the associated revenue over time as it stands ready to perform services provided. This disclosure does not include revenue related to performance obligations that are part of a contract with original durations of one year or less. In addition, this
19
disclosure does not include expected consideration related to performance obligations for which Dominion Energy Midstream elects to recognize re
venue in the amount it has a right to invoice.
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Total
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue expected to be
recognized on multi-
year contracts in place at
September 30, 2018
|
|
$ 284.5
|
|
$ 1,131.5
|
|
$ 1,101.5
|
|
$ 1,072.5
|
|
$ 1,014.6
|
|
$ 13,323.6
|
|
$ 17,928.2
|
Contract liabilities represent an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration, or the amount that is due, from the customer. At September 30, 2018 and December 31, 2017, Dominion Energy Midstream’s contract liability balances were $19.8 million and $15.7 million, respectively, presented in other current liabilities and other deferred credits and other liabilities in Dominion Energy Midstream’s Consolidated Balance Sheets. During the nine months ended September 30, 2018, $2.3 million of revenue was recognized from the beginning contract liability balance as Dominion Energy Midstream fulfilled its obligations to provide service to its customers.
Dominion Energy Midstream’s operating revenue, prior to the adoption of revised guidance for revenue recognition from contracts with customers, consisted of the following:
|
|
Three Months Ended
September 30, 2017
|
|
Nine Months Ended
September 30, 2017
|
(millions)
|
|
|
|
|
Gas transportation and storage
|
|
$ 109.3
|
|
$ 346.2
|
Regulated gas sales
|
|
0.1
|
|
0.6
|
Other
|
|
3.6
|
|
12.1
|
Total operating revenue
|
|
$ 113.0
|
|
$ 358.9
|
Note 6. Fair Value Measurements
Dominion Energy Midstream's fair value measurements are made in accordance with the policies discussed 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, 2017. See Note 7 for further information about Dominion Energy Midstream’s derivatives and hedge accounting activities.
Recurring Fair Value Measurements
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.
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives
|
|
$
|
—
|
|
|
$
|
3.6
|
|
|
$
|
—
|
|
|
$
|
3.6
|
|
Total assets
|
|
$
|
—
|
|
|
$
|
3.6
|
|
|
$
|
—
|
|
|
$
|
3.6
|
|
At December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives
|
|
$
|
—
|
|
|
$
|
1.4
|
|
|
$
|
—
|
|
|
$
|
1.4
|
|
Total assets
|
|
$
|
—
|
|
|
$
|
1.4
|
|
|
$
|
—
|
|
|
$
|
1.4
|
|
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 and equivalents, customer and other receivables, affiliated receivables, accounts payable, payables to affiliates, Dominion Energy credit facility borrowings, affiliated current borrowings and customer deposits are
20
representative of fai
r 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:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair
Value
(1)
|
|
|
Carrying
Amount
|
|
|
Estimated Fair
Value
(1)
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory note receivable from Dominion Energy
|
|
$
|
1,986.0
|
|
|
$
|
1,997.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Long-term debt, including securities due within one year
(2)
|
|
|
2,715.5
|
|
|
|
2,738.9
|
|
|
|
730.7
|
|
|
|
760.7
|
|
Credit facility borrowings
|
|
|
73.0
|
|
|
|
73.0
|
|
|
|
—
|
|
|
|
—
|
|
(1)
|
Fair value is estimated using market prices, where available, and interest rates currently available for issuances of notes receivable and 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 7. Derivatives and Hedge Accounting Activities
Dominion Energy Midstream’s accounting policies, objectives, and strategies for using derivative instruments are discussed in Note 3 to the Consolidated Financial Statements in Dominion Energy Midstream’s Annual Report on Form 10-K for the year ended December 31, 2017. See Note 6 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.
Balance Sheet Presentation
The tables below present Dominion Energy Midstream's derivative asset balances by type of financial instrument, before and after the effects of offsetting.
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Gross
Amounts
of Recognized
Assets
|
|
|
Gross
Amounts
Offset in the
Consolidated
Balance Sheet
|
|
|
Net Amounts
of Assets
Presented
in the
Consolidated
Balance Sheet
|
|
|
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
|
|
$
|
3.6
|
|
|
$
|
—
|
|
|
$
|
3.6
|
|
|
$
|
1.4
|
|
|
$
|
—
|
|
|
$
|
1.4
|
|
Total derivatives, subject to a master netting or
similar arrangement
|
|
$
|
3.6
|
|
|
$
|
—
|
|
|
$
|
3.6
|
|
|
$
|
1.4
|
|
|
$
|
—
|
|
|
$
|
1.4
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset
in the Consolidated
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Net Amounts
of Assets
Presented in the Consolidated
Balance Sheet
|
|
|
Financial
Instruments
|
|
|
Cash
Collateral
Received
|
|
|
Net Amounts
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over-the-counter
|
|
$
|
3.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3.6
|
|
|
$
|
1.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.4
|
|
Total
|
|
$
|
3.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3.6
|
|
|
$
|
1.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.4
|
|
21
Volumes
The following table presents the volume of Dominion Energy Midstream’s derivative activity at September 30, 2018. 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 nine months ended September 30, 2018 and 2017, there were no gains or losses on hedging instruments determined to be ineffective.
The following table presents selected information related to gains on cash flow hedges included in AOCI in Dominion Energy Midstream's Consolidated Balance Sheet at September 30, 2018:
|
|
AOCI
|
|
|
Amounts Expected
to be Reclassified
to Earnings
During the
Next 12 Months
|
|
|
Maximum
Term
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
Interest rate
|
|
$
|
3.6
|
|
|
$
|
2.6
|
|
|
14 months
|
Total
|
|
$
|
3.6
|
|
|
$
|
2.6
|
|
|
|
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.
22
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.
|
|
Fair Value –
Derivatives under
Hedge Accounting
|
|
|
Total Fair
Value
|
|
(millions)
|
|
|
|
|
|
|
|
|
At September 30, 2018
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Interest rate
|
|
$
|
2.6
|
|
|
$
|
2.6
|
|
Total current derivative assets
(1)
|
|
|
2.6
|
|
|
|
2.6
|
|
Noncurrent Assets
|
|
|
|
|
|
|
|
|
Interest rate
|
|
|
1.0
|
|
|
|
1.0
|
|
Total noncurrent derivative assets
(2)
|
|
|
1.0
|
|
|
|
1.0
|
|
Total derivative assets
|
|
$
|
3.6
|
|
|
$
|
3.6
|
|
At December 31, 2017
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Interest rate
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Total current derivative assets
(1)
|
|
|
0.1
|
|
|
|
0.1
|
|
Noncurrent Assets
|
|
|
|
|
|
|
|
|
Interest rate
|
|
|
1.3
|
|
|
|
1.3
|
|
Total noncurrent derivative assets
(2)
|
|
|
1.3
|
|
|
|
1.3
|
|
Total derivative assets
|
|
$
|
1.4
|
|
|
$
|
1.4
|
|
(1)
|
Current derivative assets are presented in other current assets in Dominion Energy Midstream’s Consolidated Balance Sheets.
|
(2)
|
Noncurrent derivative assets are presented in other deferred charges and other assets in Dominion Energy Midstream's Consolidated Balance Sheets.
|
The following tables present the gains and losses on Dominion Energy Midstream's derivatives, as well as where the associated activity is presented in its Consolidated Balance Sheets and Statements of Income.
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 September 30, 2018
|
|
|
|
|
|
|
|
|
Derivative type and location of gains (losses):
|
|
|
|
|
|
|
|
|
Interest rate
(2)
|
|
$
|
0.2
|
|
|
$
|
0.4
|
|
Total
|
|
$
|
0.2
|
|
|
$
|
0.4
|
|
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
Derivative type and location of gains (losses):
|
|
|
|
|
|
|
|
|
Interest rate
(2)
|
|
$
|
0.3
|
|
|
$
|
(0.4
|
)
|
Total
|
|
$
|
0.3
|
|
|
$
|
(0.4
|
)
|
Nine Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
Derivative type and location of gains (losses):
|
|
|
|
|
|
|
|
|
Interest rate
(2)
|
|
$
|
2.7
|
|
|
$
|
0.5
|
|
Total
|
|
$
|
2.7
|
|
|
$
|
0.5
|
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
Derivative type and location of gains (losses):
|
|
|
|
|
|
|
|
|
Interest rate
(2)
|
|
$
|
(1.2
|
)
|
|
$
|
(1.0
|
)
|
Total
|
|
$
|
(1.2
|
)
|
|
$
|
(1.0
|
)
|
(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.
|
23
Note 8. 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 10 to the Consolidated Financial Statements in Dominion Energy Midstream’s Annual Report on Form 10-K for the year ended December 31, 2017.
The table below summarizes distributions received and income earned from Dominion Energy Midstream's equity method investees for the three and nine months ended September 30, 2018 and 2017.
|
|
Iroquois
|
|
|
White River Hub
|
|
|
|
Iroquois
|
|
|
White River Hub
|
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended September 30, 2018
|
|
Three Months
|
|
|
|
Nine Months
|
|
|
Distributions received
|
|
$
|
7.4
|
|
|
$
|
1.5
|
|
(1)
|
|
$
|
22.2
|
|
|
$
|
3.9
|
|
(1)
|
Income from equity method investees
|
|
|
4.6
|
|
|
|
1.0
|
|
|
|
|
19.7
|
|
|
|
3.0
|
|
|
Period Ended September 30, 2017
|
|
|
|
|
|
|
Distributions received
|
|
$
|
7.2
|
|
|
$
|
1.0
|
|
|
|
$
|
18.9
|
|
|
$
|
3.3
|
|
|
Income from equity method investees
|
|
|
5.2
|
|
|
|
1.0
|
|
|
|
|
16.6
|
|
|
|
2.8
|
|
|
(1)
|
Includes $0.4 million of accrued distributions at September 30, 2018, presented in customer and other receivables in the Consolidated Balance Sheets.
|
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 September 30, 2018 and December 31, 2017.
|
|
Iroquois
|
|
|
White River Hub
|
|
(millions)
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Carrying amount of investment
|
|
$
|
213.1
|
|
|
$
|
215.6
|
|
|
$
|
37.3
|
|
|
$
|
38.2
|
|
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.
|
24
Note 9. I
ntangible Assets
In the first quarter of 2018, intangible assets increased $25.0 million for a contractual agreement with a local government taxing authority through 2032 related to the Liquefaction Project.
Note 10. Regulatory Assets and Liabilities
Regulatory assets and liabilities include the following:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
(millions)
|
|
|
|
|
|
|
|
|
Regulatory assets:
|
|
|
|
|
|
|
|
|
Unrecovered gas costs
(1)
|
|
$
|
1.8
|
|
|
$
|
11.7
|
|
Interest rate hedges
(2)
|
|
|
0.6
|
|
|
|
0.7
|
|
Cost of reacquired debt
(3)
|
|
|
0.4
|
|
|
|
—
|
|
Other
|
|
|
1.4
|
|
|
|
2.1
|
|
Regulatory assets-current
|
|
|
4.2
|
|
|
|
14.5
|
|
Income taxes recoverable through future rates
(4)
|
|
|
2.8
|
|
|
|
2.8
|
|
Interest rate hedges
(2)
|
|
|
32.9
|
|
|
|
33.3
|
|
Cost of reacquired debt
(3)
|
|
|
0.6
|
|
|
|
1.3
|
|
Other
|
|
|
3.4
|
|
|
|
3.1
|
|
Regulatory assets-noncurrent
(5)
|
|
|
39.7
|
|
|
|
40.5
|
|
Total regulatory assets
|
|
$
|
43.9
|
|
|
$
|
55.0
|
|
Regulatory liabilities:
|
|
|
|
|
|
|
|
|
Overrecovered gas costs
(1)
|
|
$
|
3.6
|
|
|
$
|
4.8
|
|
Customer bankruptcy settlement
(6)
|
|
|
2.8
|
|
|
|
2.8
|
|
Provision for future cost of removal and AROs
(7)
|
|
|
2.3
|
|
|
|
2.3
|
|
Other
|
|
|
1.4
|
|
|
|
4.1
|
|
Regulatory liabilities-current
(8)
|
|
|
10.1
|
|
|
|
14.0
|
|
Provision for future cost of removal and AROs
(7)
|
|
|
103.3
|
|
|
|
101.8
|
|
Unrecognized other postretirement benefit costs
(9)
|
|
|
14.0
|
|
|
|
12.8
|
|
Customer bankruptcy settlement
(6)
|
|
|
12.7
|
|
|
|
14.8
|
|
Other
|
|
|
1.4
|
|
|
|
1.7
|
|
Regulatory liabilities-noncurrent
|
|
|
131.4
|
|
|
|
131.1
|
|
Total regulatory liabilities
|
|
$
|
141.5
|
|
|
$
|
145.1
|
|
(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)
|
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 2.4 years at September 30, 2018.
|
(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)
|
Noncurrent regulatory assets are presented in other deferred charges and other assets in Dominion Energy Midstream’s Consolidated Balance Sheets.
|
(6)
|
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.
|
(7)
|
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.
|
(8)
|
Current regulatory liabilities are presented in other current liabilities in Dominion Energy Midstream’s Consolidated Balance Sheets.
|
(9)
|
Reflects a regulatory liability for the collection of postretirement benefit costs allowed in rates in excess of expenses incurred at Dominion Energy Questar Pipeline
.
|
At September 30, 2018, approximately $40.8 million of regulatory 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 within two years.
25
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 matters discussed below, there have been no significant developments regarding the pending regulatory matters disclosed 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, 2017.
In March 2018, FERC announced actions to address the income tax allowance component of regulated entities' cost-of-service rates as a result of the 2017 Tax Reform Act. FERC issued a notice of proposed rulemaking introducing a process for determining whether jurisdictional natural gas pipelines may be collecting unjust and unreasonable rates in light of the reduction in the corporate income tax rate. The proposed rule would require all interstate natural gas pipelines to make a one-time informational filing with FERC to provide financial information to allow FERC and other interested parties to analyze the impacts of the changes in tax law. The actions also included the reversal of FERC's policy allowing MLPs to recover an income tax allowance in cost-of-service rates and requiring other pass-through entities to justify the inclusion of an income tax allowance. FERC also issued a notice of inquiry seeking comments on whether it should take any additional actions to address changes in federal corporate income taxes, the elimination of an income tax allowance for MLPs, excess or deficient accumulated deferred income taxes and bonus depreciation, among other items.
In July 2018, FERC issued a final rule adopting and modifying the procedures for determining whether jurisdictional natural gas pipelines may be collecting unjust and unreasonable rates in light of the reduction in the corporate income tax rate. These procedures are generally the same as the proposals issued in March; however the final rule modifies the treatment of the income tax allowance for MLPs and other pass-through entities in the informational filing. Specifically, this final rule does not require MLPs to eliminate their income tax allowances when completing the informational filing, and allows entities that are wholly-owned by corporations to include an income tax allowance. Although the informational filing does not require the elimination of the income tax allowance for MLPs, and provides options to MLPs to address the income tax allowance that were previously unavailable including providing evidence that a double recovery of income taxes does not exist, there can be no assurance that MLPs would be allowed to include an income tax allowance in the future. Beginning in October 2018, Dominion Energy Midstream has filed or expects to file the required informational reports with FERC indicating no changes to current rates charged to customers. Given the associated uncertainty, Dominion Energy Midstream is currently unable to predict the outcome of these matters; however, any change in rates permitted to be charged to customers could have a material impact on results of operations, financial condition and/or cash flows.
In March 2018, Overthrust received notice that FERC initiated an investigation under Section 5 of the NGA to determine whether its rates charged to customers are “just and reasonable.” In October 2018, Overthrust filed a proposed stipulation and settlement agreement resolving all issues in this proceeding. Under the terms of the settlement agreement, Overthrust’s rates effective 2019 would result in a decrease to annual revenues and depreciation expense of approximately $3.1 million and $6.7 million, respectively, and Overthrust would be subject to a rate moratorium through April 2021. Overthrust has requested approval by the end of 2018. This case is pending.
In March 2018, Cove Point received FERC authorization to commence service of the Liquefaction Project, which commenced commercial operations in April 2018.
In June 2015, Cove Point executed two binding precedent agreements for the approximately $150 million Eastern Market Access Project. In January 2018, Cove Point received FERC authorization to construct and operate the project facilities, which are expected to be placed in service in late 2019. In October 2018, Cove Point announced it is evaluating alternatives to a proposed Charles County, Maryland compressor station that was initially part of this project. Cove Point is working with the project customers to evaluate alternatives to meet their needs. Any resulting modification resulting from ongoing negotiation with the project customers could impact Dominion Energy Midstream’s financial results of operations and/or financial position.
Two parties previously separately filed petitions for review of the FERC Order in the U.S. Court of Appeals for the D.C. Circuit, which petitions were consolidated. In July 2016, the court denied one party’s petition for review of the FERC Order. The court also issued a decision remanding the other party’s petition for review of the FERC Order to FERC for further explanation of how FERC’s decision that a previous transaction with an existing import shipper was not unduly discriminatory. In September 2017, FERC issued its order on remand from the U.S. Court of Appeals for the D.C. Circuit, and reaffirmed its rulings in its prior orders that Cove Point did not violate the prohibition against undue discrimination by agreeing to a capacity reduction and early contract termination with the existing import shipper. In October 2017, the party filed a
26
request for rehearing of the FERC Order on remand. In August 2018, FERC issued its rehearing order affirming and clarifying its previous orders.
Note 12. Variable
Interest Entities
There have been no significant changes regarding the entities Dominion Energy Midstream considers VIEs 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, 2017, except for $2.0 billion of debt incurred in September 2018 by Cove Point that is nonrecourse to Dominion Energy Midstream and is secured by Dominion Energy’s common equity interest in Cove Point. See Note 13 for additional information.
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 nine months ended September 30, 2018, these costs were $0.6 million and $1.8 million, respectively. For the three and nine months ended September 30, 2017, these costs were $0.6 million and $1.5 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 $7.8 million, $3.8 million and $7.3 million for the three months ended September 30, 2018, respectively, and $25.5 million, $12.5 million and $21.9 million for the nine months ended September 30, 2018, respectively. Dominion Energy Midstream purchased shared services from DES, DECGS and DEQPS of approximately $6.8 million, $3.1 million and $6.6 million for the three months ended September 30, 2017, respectively, and $20.4 million, $10.0 million and $24.3 million for the nine months ended September 30, 2017, respectively. The Consolidated Balance Sheets at September 30, 2018 and December 31, 2017 include amounts due from Dominion Energy Midstream to DES, DECGS and DEQPS of approximately $6.5 million and $8.7 million, respectively.
Note 13. Significant Financing Transactions
Credit Facility
In March 2018, Dominion Energy Midstream entered into a $500.0 million revolving credit facility with certain third party lenders to replace the existing $300.0 million credit facility with Dominion Energy, which was terminated in May 2018. See Note 16 for further information. The credit facility matures in March 2021, bears interest at a variable rate, and can be used to support bank borrowings and the issuance of commercial paper, as well as to support up to $250.0 million of letters of credit. Borrowings under the credit facility will be utilized primarily to fund capital expenditures and repay the outstanding balance on the terminated Dominion Energy credit facility. At September 30, 2018, Dominion Energy Midstream had $73.0 million outstanding on this credit facility.
Long-term Debt
In January 2018, Dominion Energy Questar Pipeline issued, through private placements, $100.0 million of 3.53% senior notes and $150.0 million of 3.91% senior notes that mature in 2028 and 2038, respectively, to repay $250.0 million of senior notes that matured in February 2018.
In September 2018, Cove Point closed on an up to $3.0 billion term loan that is secured by Dominion Energy’s common equity interest in Cove Point, bears interest at a variable rate and matures in 2021. In accordance with the terms of the term loan, Cove Point borrowed $2.0 billion at closing and can borrow up to an additional $1.0 billion by the end of 2018. Cove Point incurred approximately $14.0 million of debt issuance costs. Under the terms of the term loan, Cove Point is restricted from issuing certain debt, selling the Cove Point LNG Facility, paying distributions to Dominion Energy or taking certain other actions without necessary approvals. Cove Point loaned the net proceeds to Dominion Energy in exchange for a promissory note, as described in Note 16.
Note 14. 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
27
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 cu
rrently 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 ma
y 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. Managem
ent 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.
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 September 30, 2018, Dominion Energy Midstream had purchased $12.2 million of surety bonds, including $9.5 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 15. Credit Risk
Dominion Energy Midstream’s accounting policy for credit risk is discussed in Note 21 to the Consolidated Financial Statements in Dominion Energy Midstream’s Annual Report on Form 10-K for the year ended December 31, 2017.
Upon the Liquefaction Project commencing commercial operations in April 2018, the majority of Cove Point’s revenue and earnings are expected to be generated from annual reservation payments under certain terminalling, storage and transportation contracts with the Export Customers. If such agreements were terminated and Cove Point was unable to replace such agreements on comparable terms, there could be a material impact on results of operations, financial condition and/or cash flows.
At September 30, 2018, Dominion Energy Midstream provided service to approximately 160 customers, including the Export Customers, Storage Customers, marketers or end users, power generators, utilities and the Import Shippers. The two largest customers comprised approximately 60% and 48% of the total operating revenue for the three and nine months ended September 30, 2018, respectively, with Dominion Energy Midstream’s largest customer representing approximately 33% and 24% of such amount during the periods. The two largest customers comprised approximately 29% of the total transportation and storage revenue for the three months ended September 30, 2017, with Dominion Energy Midstream’s largest customer, an affiliate, representing approximately 17% of such amount during the period. The three largest customers comprised approximately 39% of the total transportation and storage revenue for the nine months ended September 30, 2017, with Dominion Energy Midstream's largest customer, an affiliate, representing approximately 17% of such amount during the period.
Through June 2018, Dominion Energy Midstream received $120.4 million of cash primarily as a result of a downgrade in a customer’s guarantor’s credit rating, in accordance with the terms of the customer’s contracts and certain provisions of the FERC Gas Tariff. In September 2018, Dominion Energy Midstream returned $100.8 million of cash to the customer upon the completion of certain conditions.
Note 16. 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 18 to the Consolidated Financial Statements in Dominion Energy Midstream's Annual Report on Form 10-K for the year ended December 31, 2017. In Dominion Energy Midstream's Consolidated Balance Sheets at September 30, 2018 and December 31, 2017, amounts due to Dominion Energy
28
associated with these benefit plans included in other deferred credits and other liabilities were $10.4 million and $8.2 million, respectively, and amounts due from Domin
ion Energy at September 30, 2018 and December 31, 2017 included in other deferred charges and other assets were $3.1 million and $2.2 million, respectively. In connection with the Dominion Energy Questar Pipeline Acquisition, transition costs of $1.8 milli
on and $6.1 million incurred by our general partner were expensed to operations and maintenance expense in the Consolidated Statements of Income for the three and nine months ended September 30, 2017, respectively. 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.
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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of natural gas transportation and storage services to
affiliates
|
|
$
|
18.1
|
|
|
$
|
19.0
|
|
|
$
|
56.6
|
|
|
$
|
60.6
|
|
Services provided to affiliates
|
|
|
0.2
|
|
|
|
0.8
|
|
|
|
0.5
|
|
|
|
1.7
|
|
Purchased gas from affiliates
|
|
|
—
|
|
|
|
1.3
|
|
|
|
—
|
|
|
|
5.1
|
|
Goods and services provided by affiliates to Dominion Energy Midstream
(1)
|
|
|
22.4
|
|
|
|
23.1
|
|
|
|
71.9
|
|
|
|
71.9
|
|
(1)
|
Includes $12.3 million and $18.2 million of capitalized expenditures for the nine months ended September 30, 2018 and 2017, 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. At December 31, 2017, $26.4 million was outstanding against the credit facility. Interest charges related to Dominion Energy Midstream's borrowings against the facility were $0.5 million for the nine months ended September 30, 2018, and $0.5 million and $1.3 million for the three and nine months ended September 30, 2017, respectively. In April and May 2018, Dominion Energy Midstream repaid $73.0 million, representing all of the outstanding principal plus interest. In May 2018, Dominion Energy Midstream provided notice to Dominion Energy for termination of the credit facility. Dominion Energy waived the 90-day notice requirement and termination was effective immediately.
Intercompany Revolving Credit Agreement with Dominion Energy
In March 2018, Cove Point entered into a $50.0 million intercompany revolving credit agreement with Dominion Energy, which matures in March 2019 and bears interest at a variable rate, for the purpose of funding items other than capital expenditures. There was no outstanding balance under this credit agreement at September 30, 2018. Interest charges related to Cove Point’s borrowings under the credit agreement were less than $0.1 million and $0.2 million for the three and nine months ended September 30, 2018, respectively.
Promissory Note Receivable from Dominion Energy
In September 2018, in connection with the closing of an up to $3.0 billion term loan discussed in Note 13, Cove Point loaned Dominion Energy $2.0 billion in exchange for an up to $3.0 billion promissory note, which includes the ability to loan an additional $1.0 billion by the end of 2018. The promissory note has an annual interest rate of 3.6% which is payable quarterly and matures in 2021. Interest income related to Dominion Energy’s borrowing was $1.2 million for both the three and nine months ended September 30, 2018, presented in other income in the Consolidated Statements of Income and accrued interest was $1.2 million at September 30, 2018, presented in affiliated receivables in the Consolidated Balance Sheets.
Unbilled Revenue
Affiliated receivables at September 30, 2018 and December 31, 2017 included $5.9 million and $7.0 million, respectively, of accrued unbilled revenue based on estimated amounts of services provided but not yet billed to affiliates.
29
Natural Gas Imbalances
Dominion Energy Midstream maintains natural gas imbalances with affiliates. The imbalances with affiliates are provided below:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
(millions)
|
|
|
|
|
|
|
|
|
Imbalances payable to affiliates
(1)
|
|
$
|
0.6
|
|
|
$
|
1.7
|
|
Imbalances receivable from affiliates
(2)
|
|
|
5.7
|
|
|
|
—
|
|
(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 22 to the Consolidated Financial Statements in Dominion Energy Midstream's Annual Report on Form 10-K for the year ended December 31, 2017. There have been no changes to this agreement.
Contributions from Dominion Energy
For the three and nine months ended September 30, 2018, Dominion Energy contributed $5.1 million and $106.5 million, respectively, to Cove Point. For the three and nine months ended September 30, 2017, Dominion Energy contributed $170.4 million and $634.0 million, respectively to Cove Point. These contributions from Dominion Energy to Cove Point primarily represent funding for capital expenditures related to the Liquefaction Project. During the first quarter of 2018, $25.0 million of contributions were utilized to fund the payment under a contractual agreement with a local government taxing authority at Cove Point.
For the three and nine months ended September 30, 2017, Dominion Energy allocated costs of $1.7 million and $5.9 million, respectively, to Dominion Energy Midstream related to the Dominion Energy Questar Pipeline Acquisition for which Dominion Energy did not seek reimbursement.
Distributions from Cove Point to Dominion Energy
Until the Liquefaction Project was completed, Cove Point was prohibited from making a distribution on its common equity interests unless it had a distribution reserve sufficient to pay two quarters of the Preferred Return Distributions. Following the commencement of commercial operations of the Liquefaction Project in April 2018, Cove Point is generating sufficient
cash flows from operations and undistributed Net Operating Income to pay the Preferred Return Distributions. In June 2018, Dominion Energy Midstream caused Cove Point to pay its second quarter 2018 Preferred Return Distribution and subsequently to distribute $26.5 million, with respect to its common equity interest, to Dominion Energy. In September 2018, Dominion Energy Midstream caused Cove Point to pay its third quarter 2018 Preferred Return Distribution and subsequently to distribute $20.0 million, with respect to its common equity interest, to Dominion Energy.
Note 17. 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 23 to the Consolidated Financial Statements in Dominion Energy Midstream's Annual Report on Form 10-K for the year ended December 31, 2017 for additional information.
Note 18. 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, consists of gas transportation, LNG terminalling services 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.
30
The following table presents segment information pertaining to Dominion Energy Midstream's operations:
|
|
Gas Infrastructure
|
|
|
Corporate and
Other
|
|
|
Total
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
284.2
|
|
|
$
|
—
|
|
|
$
|
284.2
|
|
Earnings from equity method investees
|
|
|
5.6
|
|
|
|
—
|
|
|
|
5.6
|
|
Net income including noncontrolling interest and predecessors
|
|
|
158.6
|
|
|
|
—
|
|
|
|
158.6
|
|
Net income attributable to partners
|
|
|
47.5
|
|
|
|
—
|
|
|
|
47.5
|
|
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
113.0
|
|
|
$
|
—
|
|
|
$
|
113.0
|
|
Earnings from equity method investees
|
|
|
6.2
|
|
|
|
—
|
|
|
|
6.2
|
|
Net income (loss) including noncontrolling interest and predecessors
|
|
|
36.6
|
|
|
|
(1.7
|
)
|
|
|
34.9
|
|
Net income (loss) attributable to partners
|
|
|
50.3
|
|
|
|
(1.7
|
)
|
|
|
48.6
|
|
Nine Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
641.9
|
|
|
$
|
—
|
|
|
$
|
641.9
|
|
Earnings from equity method investees
|
|
|
22.7
|
|
|
|
—
|
|
|
|
22.7
|
|
Net income including noncontrolling interest and predecessors
|
|
|
324.5
|
|
|
|
—
|
|
|
|
324.5
|
|
Net income attributable to partners
|
|
|
152.7
|
|
|
|
—
|
|
|
|
152.7
|
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
358.9
|
|
|
$
|
—
|
|
|
$
|
358.9
|
|
Earnings from equity method investees
|
|
|
19.4
|
|
|
|
—
|
|
|
|
19.4
|
|
Net income (loss) including noncontrolling interest and predecessors
|
|
|
126.7
|
|
|
|
(5.9
|
)
|
|
|
120.8
|
|
Net income (loss) attributable to partners
|
|
|
148.7
|
|
|
|
(5.9
|
)
|
|
|
142.8
|
|
31