Acquisitions and Dispositions

Dominion

Acquisition of Dominion Questar

In September 2016, Dominion completed the Dominion Questar Combination and Dominion Questar became a wholly-owned subsidiary of Dominion. Dominion Questar is a Rockies-based integrated natural gas company that operates approximately 3,400 miles of gas transmission pipeline, 27,500 miles of gas distribution pipeline and 56 bcf of gas storage. Additionally, Dominion Questar develops and produces natural gas from cost-of-service reserves for its retail distribution customers. The Dominion Questar Combination provides Dominion with pipeline infrastructure that provides a principal source of gas supply to Western states. Dominion Questar’s regulated businesses will also provide further balance between Dominion's electric and gas operations.

In accordance with the terms of the Dominion Questar Combination, at closing, each share of issued and outstanding Dominion Questar common stock was converted into the right to receive $25.00 per share in cash. The total consideration was $4.4 billion based on 175.5 million shares of Dominion Questar outstanding at closing.

Dominion financed the Dominion Questar Combination through the: (1) August 2016 issuance of $1.4 billion of 2016 Equity Units, (2) August 2016 issuance of $1.3 billion of senior notes, (3) September 2016 borrowing of $1.2 billion under a private placement term loan agreement and (4) $500 million of the proceeds from the April 2016 issuance of common stock. See Note 14 for more information.

Purchase Price Allocation

Dominion Questar’s assets acquired and liabilities assumed were measured at estimated fair value at the closing date and are included in the Dominion Energy operating segment. The majority of Dominion Questar’s operations are subject to the rate-setting authority of FERC, the Utah Commission and/or the Wyoming Commission and therefore are accounted for pursuant to ASC 980, Regulated Operations. The fair values of Dominion Questar’s assets and liabilities subject to rate-setting and cost recovery provisions provide revenues derived from costs, including a return on investment of assets and liabilities included in rate base. As such, the fair values of these assets and liabilities equal their carrying values. Accordingly, neither the assets and liabilities acquired, nor the pro forma financial information, reflect any adjustments related to these amounts.

The fair value of Dominion Questar’s assets acquired and liabilities assumed that are not subject to the rate-setting provisions discussed above was determined using the income approach. In addition, the fair value of Dominion Questar’s 50% interest in White River Hub, accounted for under the equity method, was determined using the market approach and income approach. The valuations are considered Level 3 fair value measurements due to the use of significant judgmental and unobservable inputs, including projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future cash flows and future market prices.

The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed was recognized as goodwill at the closing date. The goodwill reflects the value associated with enhancing Dominion’s regulated portfolio of businesses, including the expected increase in demand for low-carbon, natural gas-fired generation in the Western states and the expected continued growth of rate-regulated businesses located in a defined service area with a stable regulatory environment. The goodwill recognized is not deductible for income tax purposes, and as such, no deferred taxes have been recorded related to goodwill.

The table below shows the preliminary allocation of the purchase price to the assets acquired and liabilities assumed at closing. The allocation is subject to change during the remainder of the measurement period, which ends one year from the closing date, as additional information is obtained about the facts and circumstances that existed at the closing date. Any material adjustments to provisional amounts identified during the measurement period will be recognized and disclosed in the reporting period in which the adjustment amounts are determined.



	Amount
(millions)
Total current assets	$	224
Investments⁽¹⁾	58
Property, plant and equipment⁽²⁾	4,120
Goodwill	3,111
Total deferred charges and other assets, excluding goodwill	75
Total Assets	7,588
Total current liabilities⁽³⁾	791
Long-term debt⁽⁴⁾	963
Deferred income taxes	798
Regulatory liabilities	259
Asset retirement obligations	160
Other deferred credits and other liabilities⁽⁵⁾	220
Total Liabilities	3,191
Total estimated purchase price	$	4,397


(1)	Includes $40 million for an equity method investment in White River Hub. The fair value adjustment on the equity method investment in White River Hub is considered to be equity method goodwill and is not amortized.


(2)	Nonregulated property, plant and equipment, excluding land, will be depreciated over remaining useful lives primarily ranging from 9 to 18 years.


(3)	Includes $301 million of short-term debt, of which $24 million is outstanding at September 30, 2016, as well as a $250 million short-term note which matures in February 2017 and bears interest at a variable rate.


(4)	Unsecured senior notes have maturities which range from 2017 to 2048 and bear interest at rates from 2.98% to 7.20%.


(5)	Includes a $35 million capital lease obligation with undiscounted future minimum lease payments of $1 million remaining in 2016, $4 million per year for 2017 through 2020, and $37 million in total thereafter.

Regulatory Matters

The transaction required approval of Dominion Questar’s shareholders, clearance from the Federal Trade Commission under the Hart-Scott-Rodino Act and approval from both the Utah Commission and the Wyoming Commission. In February 2016, the Federal Trade Commission granted antitrust approval of the Dominion Questar Combination under the Hart-Scott-Rodino Act. In May 2016, Dominion Questar's shareholders voted to approve the Dominion Questar Combination. In August 2016 and September 2016, approvals were granted by the Utah Commission and the Wyoming Commission, respectively. Information regarding the transaction was also provided to the Idaho Public Utilities Commission, who acknowledged the Dominion Questar Combination in October 2016, and directed Dominion Questar to notify the Idaho Public Utilities Commission when it makes filings with the Utah Commission.

Approval of the Dominion Questar Combination in Utah and Wyoming was conditioned upon Dominion agreeing to the following:


•	Dominion will contribute $75 million toward the funding of Dominion Questar’s qualified and non-qualified defined-benefit pension plans and its other post-employment benefit plans within six months of the closing date. This contribution is expected to be made during the fourth quarter of 2016.


•	Dominion committed to increasing Dominion Questar's historical level of corporate contributions to charities by $1 million per year for at least five years.

•

Questar Gas withdrew its general rate case filed in July 2016 with the Utah Commission and agreed to not file a general rate case with the Utah Commission to adjust its base distribution non-gas rates prior to July 2019, unless otherwise ordered by the Utah Commission. In addition, Questar Gas agreed not to file a general rate case with the Wyoming Commission with a requested rate effective date earlier than January 2020. This does not impact Questar Gas’s ability to adjust rates through various riders.

Results of Operations and Pro Forma Information

The impact of the Dominion Questar Combination on Dominion’s operating revenue and net income attributable to Dominion in the Consolidated Statements of Income for both the three and nine months ended September 30, 2016, was an increase of $23 million and $5 million, respectively.

Dominion incurred transaction and transition costs, of which $40 million and $47 million was recorded in other operations and maintenance expense for the three and nine months ended September 30, 2016, respectively, and $13 million was recorded in interest and related charges for both the three and nine months ended September 30, 2016, in Dominion’s Consolidated Statements of Income. These costs consist of the amortization of financing costs, the charitable contribution commitment described above, employee-related expenses, professional fees, and other miscellaneous costs.

The following unaudited pro forma financial information reflects the consolidated results of operations of Dominion assuming the Dominion Questar Combination had taken place on January 1, 2015. The unaudited pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of the consolidated results of operations that would have been achieved or the future consolidated results of operations of the combined company.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016⁽¹⁾		2015		2016⁽¹⁾		2015
(millions, except EPS)
Operating Revenue	$	3,261	$	3,113	$	9,410	$	9,897
Net income attributable to Dominion	732		626		1,835		1,700
Earnings Per Common Share – Basic	$	1.17	$	1.05	$	2.99	$	2.88
Earnings Per Common Share – Diluted	$	1.17	$	1.05	$	2.99	$	2.87


(1)	Amounts include adjustments for non-recurring costs directly related to the Dominion Questar Combination.

Anticipated Contribution of Questar Pipeline to Dominion Midstream

In October 2016, Dominion entered into the Contribution Agreement under which Dominion will contribute Questar Pipeline to Dominion Midstream. Upon closing of the agreement, expected by the end of 2016, Dominion Midstream will become owner of all of the issued and outstanding membership interests of Questar Pipeline in exchange for consideration consisting of Dominion Midstream common and convertible preferred units with a combined value between $400 million and $725 million and cash between $565 million and $890 million, $300 million of which is considered a debt-financed distribution, for a total of $1.3 billion. In addition, under the terms of the Contribution Agreement, Dominion Midstream will repurchase approximately 6,657,000 common units from Dominion, and will repay its $301 million promissory note to Dominion. The cash proceeds from these transactions will be utilized to repay the $1.2 billion private placement term loan agreement borrowed in September 2016. Since Dominion consolidates Dominion Midstream for financial reporting purposes, the transactions associated with the Contribution Agreement will be eliminated upon consolidation and will not impact Dominion's financial position or cash flows.

Non-Wholly-Owned Merchant Solar Projects

Acquisitions of Four Brothers and Three Cedars

In June 2015, Dominion acquired 50% of the units in Four Brothers from SunEdison for $64 million of consideration, consisting of $2 million in cash and a $62 million payable. As of September 30, 2016, a $7 million payable is included in other current liabilities in Dominion's Consolidated Balance Sheets. Four Brothers' purpose is to operate four solar projects located in Utah, which produce and sell electricity and renewable energy credits. The facilities began commercial operations during the third quarter of 2016, with generating capacity of approximately 320 MW, at a cost of approximately $670 million.

In September 2015, Dominion acquired 50% of the units in Three Cedars from SunEdison for $43 million of consideration, consisting of $6 million in cash and a $37 million payable. As of September 30, 2016, a $4 million payable is included in other current liabilities in Dominion’s Consolidated Balance Sheets. Three Cedars’ purpose is to operate three solar projects located in Utah, which produce and sell electricity and renewable energy credits. The facilities began commercial operations during the third quarter of 2016, with generating capacity of approximately 210 MW, at a cost of approximately $450 million.

The Four Brothers and Three Cedars facilities operate under long-term power purchase, interconnection and operation and maintenance agreements. Dominion will claim 99% of the federal investment tax credits on the projects.

Dominion owns 50% of the voting interests in Four Brothers and Three Cedars and has a controlling financial interest over the entities through its rights to control operations. The allocation of the $64 million purchase price for Four Brothers resulted in $89 million of property, plant and equipment and $25 million of noncontrolling interest. The allocation of the $43 million purchase price for Three Cedars resulted in $65 million of property, plant and equipment and $22 million of noncontrolling interest. The noncontrolling interest for each entity was measured at fair value using the discounted cash flow method, with the primary components of the valuation being future cash flows (both incoming and outgoing) and the discount rate. Dominion determined its discount rate based on the cost of capital a utility-scale investor would expect, as well as the cost of capital an individual project developer could achieve via a combination of non-recourse project financing and outside equity partners. The acquired assets of Four Brothers and Three Cedars are included in the Dominion Generation operating segment.

Dominion has assumed the majority of the agreements to provide administrative and support services in connection with construction of the projects, operations and maintenance of the facilities and technical management services of the solar facilities. Costs related to services to be provided under these agreements were immaterial for the nine months ended September 30, 2016. Subsequent to Dominion’s acquisition of Four Brothers and Three Cedars, SunEdison made contributions to Four Brothers and Three Cedars of $281 million in aggregate through September 30, 2016, which are reflected as noncontrolling interests in Dominion's Consolidated Balance Sheets.

In November 2016, NRG acquired the 50% of units in Four Brothers and Three Cedars previously held by SunEdison.

Wholly-Owned Merchant Solar Projects

The following table presents significant completed acquisitions of wholly-owned merchant solar projects by Dominion in the nine months ended September 30, 2015. Long-term power purchase, interconnection and operation and maintenance agreements have been executed for all of the projects. Dominion has claimed federal investment tax credits on the projects. These projects are included in the Dominion Generation operating segment.

Completed Acquisition Date

Seller

Number of Projects

Project Location

Project Name

Initial Acquisition Cost (millions)⁽¹⁾

Project Cost (millions)⁽²⁾

Date of Commercial Operations

MW Capacity

April 2015

EC&R NA Solar PV, LLC

California

Alamo

May 2015

April 2015

EDF Renewable Development, Inc.

California

Cottonwood⁽³⁾

106

May 2015

June 2015

EDF Renewable Development, Inc.

California

Catalina 2

July 2015

SunPeak Solar, LLC

California

Imperial Valley 2

August 2015


(1)	The purchase price was primarily allocated to Property, Plant and Equipment.


(2)	Includes acquisition cost.


(3)	One of the projects, Marin Carport, began commercial operations in 2016.

In August 2016, Dominion entered into an agreement to acquire 100% of the equity interests of two solar projects in California from Solar Frontier Americas Holding, LLC for approximately $128 million in cash. The acquisition is expected to close prior to both projects commencing operations, which is expected by the end of 2017. The projects are expected to cost approximately $130 million once constructed, including the initial acquisition cost, and to generate approximately 50 MW combined.

In August 2016, Dominion entered into an agreement to acquire 100% of the equity interests of four solar projects in Virginia from Virginia Solar, LLC. The acquisition is expected to close during the fourth quarter of 2016, prior to the projects commencing operations by the end of 2017, for an amount to be determined based on the costs incurred through closing. The projects are expected to cost approximately $160 million once constructed, including the initial acquisition cost, and to generate approximately 80 MW combined.

In September 2016, Dominion entered into an agreement to acquire 100% of the equity interests of a solar project in Virginia from Community Energy Solar, LLC. The acquisition is expected to close during the first quarter of 2017, prior to the project commencing operations by the end of 2017, for an amount to be determined based on the costs incurred through closing. The project is expected to cost approximately $210 million once constructed, including the initial acquisition cost, and to generate approximately 100 MW.

Sale of Interest in Merchant Solar Projects

In September 2015, Dominion signed an agreement to sell a noncontrolling interest (consisting of 33% of the equity interests) in all of its then currently wholly-owned merchant solar projects, 24 solar projects totaling approximately 425 MW, to SunEdison, including projects discussed in the table above. In December 2015, the sale of interest in 15 of the solar projects closed for $184 million with the sale of interest in the remaining projects completed in January 2016 for $117 million. Upon closing, SunEdison sold its interest in these projects to Terra Nova Renewable Partners. Terra Nova Renewable Partners has a future option to buy all or a portion of Dominion’s remaining 67% ownership in the projects upon the occurrence of certain events, none of which had occurred as of September 30, 2016 nor are expected to occur in the remainder of 2016.

Acquisition of DCG

In January 2015, Dominion completed the acquisition of 100% of the equity interests of DCG from SCANA Corporation for $497 million in cash, as adjusted for working capital. DCG owns and operates nearly 1,500 miles of FERC-regulated interstate natural gas pipeline in South Carolina and southeastern Georgia. This acquisition supports Dominion’s natural gas expansion into the Southeast. The allocation of the purchase price resulted in $277 million of net property, plant and equipment, $250 million of goodwill, of which approximately $225 million is expected to be deductible for income tax purposes, and $38 million of regulatory liabilities. The goodwill reflects the value associated with enhancing Dominion's regulated gas position, economic value attributable to future expansion projects as well as increased opportunities for synergies. The acquired assets of DCG are included in the Dominion Energy operating segment.

On March 24, 2015, DCG converted to a limited liability company under the laws of South Carolina and changed its name from Carolina Gas Transmission Corporation to DCG. On April 1, 2015, Dominion contributed 100% of the issued and outstanding membership interests of DCG to Dominion Midstream in exchange for total consideration of $501 million, as adjusted for working capital. Total consideration to Dominion consisted of the issuance of a two-year, $301 million senior unsecured promissory note payable by Dominion Midstream at an annual interest rate of 0.6%, and 5,112,139 common units, valued at $200 million, representing limited partner interests in Dominion Midstream. The number of units was based on the volume weighted average trading price of Dominion Midstream's common units for the ten trading days prior to April 1, 2015, or $39.12 per unit. Since Dominion consolidates Dominion Midstream for financial reporting purposes, this transaction was eliminated upon consolidation and did not impact Dominion's financial position or cash flows.

Dominion Gas

Assignments of Shale Development Rights

In December 2013, Dominion Gas closed on an agreement with a natural gas producer to convey over time approximately 79,000 acres of Marcellus Shale development rights underneath one of its natural gas storage fields. The agreement provided for payments to Dominion Gas, subject to customary adjustments, of up to approximately $200 million over a period of nine years, and an overriding royalty interest in gas produced from the acreage. In March 2015, Dominion Gas and the natural gas producer closed on an amendment to the agreement, which included the immediate conveyance of approximately 9,000 acres of Marcellus Shale development rights and a two year extension of the term of the original agreement. The conveyance of development rights resulted in the recognition of $43 million ($27 million after-tax) of previously deferred revenue to operations and maintenance expense in Dominion Gas' Consolidated Statements of Income. In April 2016, Dominion Gas and the natural gas producer closed on an amendment to the agreement, which included the immediate conveyance of a 32% partial interest in the remaining approximately 70,000 acres. This conveyance resulted in the recognition of the remaining $35 million ($21 million after-tax) of previously deferred revenue to operations and maintenance expense in Dominion Gas’ Consolidated Statements of Income.

In March 2015, Dominion Gas conveyed to a natural gas producer approximately 11,000 acres of Marcellus Shale development rights underneath one of its natural gas storage fields and received proceeds of $27 million and an overriding royalty interest in gas produced from the acreage. This transaction resulted in a $27 million ($16 million after-tax) gain, included in other operations and maintenance expense in Dominion Gas' Consolidated Statements of Income.

In September 2015, Dominion Gas closed on an agreement with a natural gas producer to convey approximately 16,000 acres of Utica and Point Pleasant Shale development rights underneath one of its natural gas storage fields. The agreement provided for a payment to Dominion Gas, subject to customary adjustments, of $52 million and an overriding royalty interest in gas produced from the acreage. In September 2015, Dominion Gas received proceeds of $52 million associated with the conveyance of the acreage, resulting in a $52 million ($29 million after-tax) gain, included in other operations and maintenance expense in Dominion Gas’ Consolidated Statements of Income.

In November 2014, Dominion Gas closed on an agreement with a natural gas producer to convey over time approximately 24,000 acres of Marcellus Shale development rights underneath one of its natural gas storage fields. In connection with that agreement, in January 2016, Dominion Gas conveyed approximately 2,000 acres of Marcellus Shale development rights and received proceeds of $5 million and an overriding royalty interest in gas produced from the acreage. This transaction resulted in a $5 million ($3 million after-tax) gain. Also in connection with that agreement, in July 2016, Dominion Gas conveyed approximately 2,000 acres of Marcellus Shale development rights and received proceeds of $5 million and an overriding royalty interest in gas produced from the acreage. This transaction resulted in a $5 million ($3 million after-tax) gain. These gains are included in other operations and maintenance expense in Dominion Gas' Consolidated Statements of Income.