Edgar Filing: Dominion Energy Midstream Partners, LP

dm-10q_20180331.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

______________________________

Commission File

Number

Exact name of registrant as specified in its charter, address of

principal executive office and registrant’s telephone number

I.R.S. Employer

Identification Number

001-36684

Dominion Energy Midstream Partners, LP

46-5135781

120 Tredegar Street

Richmond, Virginia 23219

(804) 819-2000

State or other jurisdiction of incorporation or organization of the registrant: Delaware

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒		Accelerated filer	☐

Non-accelerated filer	☐	(Do not check if a smaller reporting company)	Smaller reporting company	☐

			Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The registrant had 67,959,770 common units and 31,972,789 subordinated units outstanding at April 13, 2018.

INDEX

		Page Number

	Glossary of Terms	3

	PART I. Financial Information

Item 1.	Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	38

	PART II. Other Information

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 5.	Other Information	42

Item 6.	Exhibits	43

GLOSSARY OF TERMS

The following abbreviations or acronyms used in this Form 10-Q are defined below:

Abbreviation or Acronym		Definition

2005 Agreement		An agreement effective March 1, 2005, which Cove Point entered into with the Sierra Club and the Maryland Conservation Council, Inc.

2017 Tax Reform Act		An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (previously known as the Tax Cuts and Jobs Act) enacted on December 22, 2017

Additional Return Distributions		The additional cash distribution equal to 3.0% of Cove Point’s Modified Net Operating Income in excess of $600 million distributed each year

Adjusted EBITDA		EBITDA after adjustment for EBITDA attributable to predecessors and a noncontrolling interest in Cove Point held by Dominion Energy, less income from equity method investees, plus distributions from equity method investees

AFUDC		Allowance for funds used during construction

AOCI		Accumulated other comprehensive income (loss)

ARO		Asset retirement obligation

CEO		Chief Executive Officer

CFO		Chief Financial Officer

Charleston Project		Project to provide 80,000 Dths/day of firm transportation service from an existing interconnect with Transco in Spartanburg County, South Carolina to customers in Dillon, Marlboro, Sumter, Charleston, Lexington and Richland counties, South Carolina

Cove Point		Dominion Energy Cove Point LNG, LP

Cove Point LNG Facility		An LNG terminalling and storage facility located on the Chesapeake Bay in Lusby, Maryland owned by Cove Point

Cove Point Pipeline		An approximately 136-mile natural gas pipeline owned by Cove Point that connects the Cove Point LNG Facility to interstate natural gas pipelines

DECG		Dominion Energy Carolina Gas Transmission, LLC

DECG Acquisition		The acquisition of DECG by Dominion Energy Midstream from Dominion Energy on April 1, 2015

DECGS		Dominion Energy Carolina Gas Services, Inc.

DEQPS		Dominion Energy Questar Pipeline Services, Inc.

DES		Dominion Energy Services, Inc.

DOE		U.S. Department of Energy

Dominion Energy		The legal entity, Dominion Energy, Inc., one or more of its consolidated subsidiaries (other than Dominion Energy Midstream GP, LLC and its subsidiaries) or operating segments, or the entirety of Dominion Energy, Inc. and its consolidated subsidiaries

Dominion Energy Midstream		The legal entity, Dominion Energy Midstream Partners, LP, one or more of its consolidated subsidiaries, Cove Point GP Holding Company, LLC, Iroquois GP Holding Company, LLC, DECG and Dominion Energy Questar Pipeline, or the entirety of Dominion Energy Midstream Partners, LP and its consolidated subsidiaries

Dominion Energy Questar Pipeline		The legal entity, Dominion Energy Questar Pipeline, LLC, one or more of its consolidated subsidiaries, or the entirety of Dominion Energy Questar Pipeline, LLC and its consolidated subsidiaries

Dominion Energy Questar Pipeline Acquisition		The acquisition of Dominion Energy Questar Pipeline by Dominion Energy Midstream from Dominion Energy on December 1, 2016

Abbreviation or Acronym		Definition

Dth		Dekatherm

Eastern Market Access Project		Project to provide 294,000 Dths/day of firm transportation service to help meet demand for natural gas for Washington Gas Light Company, a local gas utility serving customers in D.C., Virginia and Maryland, and Mattawoman Energy, LLC for its new electric power generation facility to be built in Maryland

EBITDA		Earnings before interest and associated charges, income tax expense, depreciation and amortization

Export Customers		ST Cove Point, LLC, a joint venture of Sumitomo Corporation and Tokyo Gas Co., LTD., and GAIL Global (USA) LNG, LLC

FERC		Federal Energy Regulatory Commission

FERC Order		FERC order issued on September 29, 2014 that granted authorization for Cove Point to construct, modify and operate the Liquefaction Project, subject to conditions, and also granted authorization to enhance the Cove Point Pipeline

GAAP		U.S. generally accepted accounting principles

Gas Infrastructure		Gas Infrastructure Group operating segment

Hyrum Project		Project to provide 100,000 Dths/day of firm transportation service to help meet growing demand for natural gas for Questar Gas Company, an affiliated local gas utility serving customers in Utah, Wyoming and Idaho

IDR		Incentive distribution right

Import Shippers		The three LNG import shippers consisting of BP Energy Company, Shell NA LNG, Inc. and Statoil Natural Gas, LLC

Iroquois		Iroquois Gas Transmission System, L.P.

Keys Energy Project		Project to provide 107,000 Dths/day of firm transportation service from Cove Point’s interconnect with Transco in Fairfax County, Virginia to Keys Energy Center, LLC’s power generating facility in Prince George’s County, Maryland

Liquefaction Project		A natural gas export/liquefaction facility at Cove Point

LNG		Liquefied natural gas

MD&A		Management’s Discussion and Analysis of Financial Condition and Results of Operations

MLP		Master limited partnership, equivalent to publicly traded partnership

Modified Net Operating Income		Cove Point’s Net Operating Income plus any interest expense included in the computation of Net Operating Income

Net Operating Income		Cove Point’s gross revenues from operations minus its interest expense and operating expenses, but excluding depreciation and amortization, as determined for U.S. federal income tax purposes

NGA		Natural Gas Act of 1938, as amended

NYSE		New York Stock Exchange

Offering		The initial public offering of common units of Dominion Energy Midstream

Overthrust		Dominion Energy Overthrust Pipeline, LLC, a wholly-owned subsidiary of Dominion Energy Questar Pipeline

Preferred Equity Interest		A perpetual, non-convertible preferred equity interest in Cove Point entitled to the Preferred Return Distributions and the Additional Return Distributions

Preferred Return Distributions		The first $50.0 million of annual cash distributions made by Cove Point

SCE&G		South Carolina Electric & Gas Company, a wholly-owned subsidiary of SCANA Corporation

SEC		Securities and Exchange Commission

Abbreviation or Acronym		Definition

Series A Preferred Units		Series A convertible preferred units representing limited partner interests in Dominion Energy Midstream, issued in December 2016

Storage Customers		The four local distribution companies that receive firm peaking services from Cove Point, consisting of Atlanta Gas Light Company, Public Service Company of North Carolina, Incorporated, Virginia Natural Gas, Inc. and Washington Gas Light Company

Transco		Transcontinental Gas Pipe Line Company, LLC

VIE		Variable interest entity

White River Hub		White River Hub, LLC

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DOMINION ENERGY MIDSTREAM PARTNERS, LP

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended March 31,
	2018			2017
(millions, except per unit data)
Operating Revenue⁽¹⁾	$	110.1		$	130.2
Operating Expenses
Purchased gas⁽¹⁾		10.3			12.2
Other operations and maintenance:
Affiliated suppliers		19.4			15.6
Other		18.2			15.5
Depreciation and amortization		24.5			24.9
Other taxes		9.7			9.3
Total operating expenses		82.1			77.5
Income from operations		28.0			52.7
Earnings from equity method investees		11.0			8.0
Other income		1.8			1.3
Interest and related charges⁽¹⁾		6.9			7.7
Net income including noncontrolling interest and predecessors		33.9			54.3
Less: Net income (loss) attributable to noncontrolling interest		(23.4	)		2.1
Net income attributable to partners	$	57.3		$	52.2
Net income attributable to partners' ownership interest
Preferred unitholders' interest in net income	$	9.5		$	9.5
General partner's interest in net income		8.9			2.7
Common unitholders' interest in net income		26.4			27.1
Subordinated unitholder's interest in net income		12.5			12.9
Net income per limited partner unit (basic)
Common units	$	0.39		$	0.40
Subordinated units		0.39			0.40
Net income per limited partner unit (diluted)
Common units	$	0.35		$	0.37
Subordinated units		0.39			0.40

(1)	See Note 16 for amounts attributable to related parties.

The accompanying notes are an integral part of Dominion Energy Midstream’s Consolidated Financial Statements.

DOMINION ENERGY MIDSTREAM PARTNERS, LP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended March 31,
	2018			2017
(millions)
Net income including noncontrolling interest and predecessors	$	33.9		$	54.3
Other comprehensive income (loss):
Net deferred gains (losses) on derivatives-hedging activities		2.0			(0.5	)
Amounts reclassified to net income:
Net derivative losses-hedging activities		0.1			—
Other comprehensive income (loss)		2.1			(0.5	)
Comprehensive income including noncontrolling interest and predecessors		36.0			53.8
Comprehensive income (loss) attributable to noncontrolling interests		(23.4	)		2.1
Comprehensive income attributable to partners	$	59.4		$	51.7

The accompanying notes are an integral part of Dominion Energy Midstream’s Consolidated Financial Statements.

DOMINION ENERGY MIDSTREAM PARTNERS, LP

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31, 2018			December 31, 2017⁽¹⁾
(millions)
ASSETS
Current Assets
Cash and cash equivalents	$	27.8		$	11.0
Restricted cash and equivalents		104.7			12.7
Customer and other receivables (less allowance for doubtful accounts of $0.3 and $0.2)		28.4			32.1
Affiliated receivables		12.3			14.1
Prepayments		6.8			11.3
Inventories		35.3			31.4
Other⁽²⁾		17.7			28.1
Total current assets		233.0			140.7
Investment in Equity Method Affiliates		256.2			253.8
Property, Plant and Equipment
Property, plant and equipment		7,868.3			7,788.9
Accumulated depreciation and amortization		(1,123.3	)		(1,101.5	)
Total property, plant and equipment, net		6,745.0			6,687.4
Deferred Charges and Other Assets
Goodwill		819.2			819.2
Intangible assets, net		59.8			35.1
Other⁽²⁾		46.6			44.1
Total deferred charges and other assets		925.6			898.4
Total assets	$	8,159.8		$	7,980.3

(1)	Dominion Energy Midstream's Consolidated Balance Sheet at December 31, 2017 has been derived from the audited Consolidated Balance Sheet at that date.

(2)	See Note 16 for amounts attributable to related parties.

The accompanying notes are an integral part of Dominion Energy Midstream's Consolidated Financial Statements.

DOMINION ENERGY MIDSTREAM PARTNERS, LP

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(Unaudited)

	March 31, 2018			December 31, 2017⁽¹⁾
(millions)
LIABILITIES AND EQUITY AND PARTNERS' CAPITAL
Current Liabilities
Securities due within one year	$	5.0		$	5.0
Accounts payable		19.1			26.5
Payables to affiliates		13.9			12.7
Dominion Energy credit facility borrowings		34.1			26.4
Affiliated current borrowings		7.3			—
Contract liabilities		1.4			1.8
Customer deposits		106.0			1.1
Other⁽²⁾		62.8			73.6
Total current liabilities		249.6			147.1
Long-Term Debt		724.1			725.7
Deferred Credits and Other Liabilities
Regulatory liabilities		132.3			131.1
Contract liabilities		14.7			13.9
Other⁽²⁾		68.5			67.3
Total deferred credits and other liabilities		215.5			212.3
Total liabilities		1,189.2			1,085.1
Commitments and Contingencies (see Note 14)
Equity and Partners' Capital
Preferred unitholders - public (18,942,714 units issued and outstanding at March 31, 2018 and December 31, 2017)		496.0			496.0
Preferred unitholder - Dominion Energy (11,365,628 units issued and outstanding at March 31, 2018 and December 31, 2017)		303.6			303.6
Common unitholders - public (49,455,142 and 49,318,899 units issued and outstanding at March 31, 2018 and December 31, 2017, respectively)		1,123.2			1,115.6
Common unitholder - Dominion Energy (18,504,628 units issued and outstanding at March 31, 2018 and December 31, 2017)		464.4			463.2
Subordinated unitholder - Dominion Energy (31,972,789 units issued and outstanding at March 31, 2018 and December 31, 2017)		495.3			493.0
General Partner interest - Dominion Energy (non-economic interest)		(22.0	)		(23.6	)
Accumulated other comprehensive income		3.5			1.4
Total Dominion Energy Midstream Partners, LP partners' capital		2,864.0			2,849.2
Noncontrolling interest		4,106.6			4,046.0
Total equity and partners' capital		6,970.6			6,895.2
Total liabilities and equity and partners' capital	$	8,159.8		$	7,980.3

(1)	Dominion Energy Midstream's Consolidated Balance Sheet at December 31, 2017 has been derived from the audited Consolidated Balance Sheet at that date.

(2)	See Note 16 for amounts attributable to related parties.

The accompanying notes are an integral part of Dominion Energy Midstream's Consolidated Financial Statements.

DOMINION ENERGY MIDSTREAM PARTNERS, LP

CONSOLIDATED STATEMENTS OF EQUITY AND PARTNERS' CAPITAL

(Unaudited)

	Partnership
	Preferred Unitholders Public			Preferred Unitholder Dominion Energy			Common Unitholders Public			Common Unitholder Dominion Energy			Subordinated Unitholder Dominion Energy			General Partner Dominion Energy (non- economic interest)			AOCI			Total Dominion Energy Midstream Partners, LP Partners' Equity and Capital			Noncontrolling interest			Total Equity and Partners' Capital
(millions)
December 31, 2016	$	492.1		$	301.2		$	1,082.1		$	457.4		$	483.0		$	(29.2	)	$	(0.4	)	$	2,786.2		$	3,313.7		$	6,099.9
Net income including noncontrolling interest and predecessors		5.9			3.6			19.6			7.5			12.9			2.7			—			52.2			2.1			54.3
Equity contributions from Dominion Energy		—			—			—			—			—			0.2			—			0.2			329.2			329.4
Distributions		(2.0	)		(1.2	)		(12.7	)		(4.8	)		(8.3	)		(1.7	)		—			(30.7	)		—			(30.7	)
Other comprehensive loss		—			—			—			—			—			—			(0.5	)		(0.5	)		—			(0.5	)
Unit awards (net of unearned compensation)		0.1			—			—			—			—			—			—			0.1			—			0.1
Other		(0.1	)		—			—			—			—			—			—			(0.1	)		0.5			0.4
March 31, 2017	$	496.0		$	303.6		$	1,089.0		$	460.1		$	487.6		$	(28.0	)	$	(0.9	)	$	2,807.4		$	3,645.5		$	6,452.9

December 31, 2017	$	496.0		$	303.6		$	1,115.6		$	463.2		$	493.0		$	(23.6	)	$	1.4		$	2,849.2		$	4,046.0		$	6,895.2
Net income (loss) including noncontrolling interest and predecessors		5.9			3.6			19.3			7.1			12.5			8.9			—			57.3			(23.4	)		33.9
Issuance of common units, net of offering costs		—			—			3.9			—			—			—			—			3.9			—			3.9
Equity contributions from Dominion Energy		—			—			—			—			—			—			—			—			83.8			83.8
Distributions		(5.9	)		(3.6	)		(15.7	)		(5.9	)		(10.2	)		(7.3	)		—			(48.6	)		—			(48.6	)
Other comprehensive income		—			—			—			—			—			—			2.1			2.1			—			2.1
Unit awards (net of unearned compensation)		—			—			0.1			—			—			—			—			0.1			—			0.1
Other		—			—			—			—			—			—			—			—			0.2			0.2
March 31, 2018	$	496.0		$	303.6		$	1,123.2		$	464.4		$	495.3		$	(22.0	)	$	3.5		$	2,864.0		$	4,106.6		$	6,970.6

The accompanying notes are an integral part of Dominion Energy Midstream's Consolidated Financial Statements.

DOMINION ENERGY MIDSTREAM PARTNERS, LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Three Months Ended March 31,	2018			2017
(millions)
Operating Activities
Net income including noncontrolling interest and predecessors	$	33.9		$	54.3
Adjustments to reconcile net income including noncontrolling interest and predecessors to net cash provided by operating activities:
Depreciation and amortization		24.5			24.9
Other adjustments		(3.8	)		(1.5	)
Changes in:
Customer and other receivables		3.7			14.2
Affiliated receivables		1.8			5.6
Prepayments		4.5			1.8
Inventories		(3.9	)		(1.8	)
Accounts payable		(2.8	)		4.6
Payables to affiliates		1.2			(1.4	)
Accrued interest, payroll and taxes		(2.3	)		2.1
Customer deposits		104.9			—
Other operating assets and liabilities		6.0			7.8
Net cash provided by operating activities		167.7			110.6
Investing Activities
Plant construction and other property additions		(110.4	)		(361.1	)
Other		—			(1.0	)
Net cash used in investing activities		(110.4	)		(362.1	)
Financing Activities
Dominion Energy credit facility borrowings, net		7.7			4.7
Affiliated current borrowings, net		7.3			—
Issuance of long-term debt		250.0			—
Repayment of long-term debt		(250.0	)		—
Contributions from Dominion Energy		83.8			329.2
Distributions to preferred unitholders		(9.5	)		(3.2	)
Distributions to common unitholders		(21.6	)		(17.5	)
Distributions to subordinated unitholder		(10.2	)		(8.3	)
Distributions to general partner		(7.3	)		(1.7	)
Other		1.3			(0.2	)
Net cash provided by financing activities		51.5			303.0
Increase in cash, restricted cash and equivalents		108.8			51.5
Cash, restricted cash and equivalents at beginning of period		23.7			64.6
Cash, restricted cash and equivalents at end of period	$	132.5		$	116.1
Supplemental Cash Flow Information
Significant noncash investing and financing activities:
Accrued capital expenditures	$	27.1		$	16.2
Equity contributions from Dominion Energy to relieve payables to affiliates		—			0.2

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 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 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 pipeline 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.

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 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.

Note 2. 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, 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 March 31, 2018, its results of operations for the three months ended March 31, 2018 and 2017 and its cash flows and changes in equity and partners’ capital for the three months ended March 31, 2018 and 2017. 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 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

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:

Revenue from Contracts with Customers

•

Regulated gas transportation and storage sales consist primarily of FERC-regulated sales of transmission and storage services;

•

Nonregulated gas transportation and storage sales consist primarily of LNG terminalling services, beginning in April 2018;

•

Other regulated revenue consists primarily of sales associated with cooling cargos at Cove Point; and

•

Other nonregulated revenue consists primarily of extracted products, gathering and processing, natural gas sales and miscellaneous service revenues.

Other Revenue

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Other revenue consists primarily of amounts related to the monetization of a bankruptcy claim acquired as part of the DECG Acquisition.

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:

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Regulated gas sales consisted primarily of FERC-regulated natural gas sales;

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Gas transportation and storage consisted primarily of FERC-regulated sales of storage and transmission services; and

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Other revenue consisted primarily of sales of purchased gas retained for use in routine operations and LNG cargos and the renegotiated contract payments related to certain import-related contracts.

Transportation and storage contracts are primarily stand-ready service contracts that include fixed reservation and variable usage fees. Fixed fees are recognized ratably over the life of the contract as the stand-ready performance obligations are satisfied, while variable usage fees are recognized when Dominion Energy Midstream has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the performance obligation completed to date. Substantially all of Dominion Energy Midstream’s revenues are derived from performance obligations satisfied over time, rather than recognized at a single point in time. The contract with the customer states the final terms of the sale, including the

description, quantity and price of each product or service purchased. Payment for most sales and services varies by contract type, but is typically due within a month of billing.

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.

Cash, Restricted Cash and Equivalents