Dominion Offers $4.4 Billion For Questar, Wexpro

Utility company Dominion Resources Inc. (NYSE: D) said Feb. 1 it has an agreement to take over integrated natural gas holding company Questar Corp. (NYSE: STR), including its pipeline company and E&P Wexpro in an all-cash deal worth $4.4 billion.

Dominion is offering $25 per share for Questar, a 30% premium on its past 20 trading days and an “attractive cash-based exit for shareholders,” said Christopher Sighinolfi, analyst with Jefferies Equity Research.

Midstream assets figure heavily into the deal. Dominion is the latest utility company offering to buy a local gas distributor for access to market share. The takeover would give Dominion infrastructure in Eastern and Western U.S. natural gas markets.

About 70% of Questar’s current EBITDA is MLP-eligible, Dominion said. The combination would add 2,700 miles of pipeline and 56 billion cubic feet (Bcf) of working storage to Dominion that will be eligible for Dominion’s midstream MLP.

Thomas F. Farrell II, Dominion chairman, president and CEO, noted in a press release the upside for Dominion Midstream investors, who will “benefit from the addition of Questar, as it is expected to contribute more than $425 million of EBITDA to Dominion's inventory of top-quality, low-risk MLP-eligible assets, supporting Dominion Midstream's targeted annual cash distribution growth rate of 22%.”

Ron Jibson, chairman, president and CEO of Questar, said the company would serve as the hub of Dominion’s Western operations.

“Our similar cultures and commitment to customers, shareholders, communities and employees make this a win-win transaction,” he said. “Dominion's reputation among its peers and analysts is unmatched. We're proud to become part of America's most-admired gas and electric utility."

Dominion said it anticipates closing the deal by the end of 2016, subject to regulatory approvals, shareholder approval and antitrust clearance.

Sighinolfi said adding Wexpro to its MLP business could be a potential problem for Dominion since E&P reserves and production have not fared well within the MLP framework. Regulators could weigh in if Dominion plans to sell Wexpro to its MLP.

Sighinolfi noted that local gas distribution companies (LDCs) remain in demand.

Questar’s sale to Dominion “represents just the latest in a long list of U.S. gas utility deals, beginning with the purchase of Nicor by AGL Resources in 2010.”

In the past seven months, similar deals have included:

• Black Hills Corp.’s (NYSE: BKH) purchase of SourceGas;
• Southern Co.’s (NYSE: SO) agreement to buy AGL Resources (NYSE: GAS); and
• Duke Energy’s (NYSE: DUK) deal to buy Piedmont Natural Gas (NYSE: PNY).

“We believe this latest deal will continue to put a bid under small- to mid-cap independent LDCs,” he said.

Air Tight

Part of Dominion’s rationale for buying Questar comes out of thin air—specifically, clean air.

The company sees increased regional reliance on low-emission, gas-fired generation to meet the emission and renewable energy programs in the Western U.S.

In 2016, Dominion projects a 10% increase in its growth guidance. The acquisition represents $6 billion in enterprise value, including the assumption of $1.6 billion in debt.

Dominion expects the Questar deal to be immediately accretive to earnings per share with “limited impact on Dominion’s balance sheet.”

Under the terms of the transaction agreement, Questar shareholders will receive $25 in cash for each share of Questar common stock.

RBC Capital Markets LLC and Mizuho Bank Ltd. provided committed financing and are Dominion’s financial advisers. Goldman Sachs & Co. was the exclusive financial adviser to Questar.

McGuireWoods LLP served as legal counsel to Dominion and Kirkland & Ellis LLP served as legal counsel to Questar.

Darren Barbee can be reached at dbarbee@hartenergy.com.