The importance of natural gas-fired generation to support environmental rules in Western states was a key factor driving Dominion Resources (NYSE:D) to pay $4.4bn for Questar Corporation (NYSE:STR), Dominion officials said Feb. 1 in a conference call with analysts.
Dominion officials also discussed earnings results for 4Q15, as well as progress on power transmission and generation projects during the call, noting that the company has several transmission projects pending regulatory review and under construction.
Dominion placed $398m in transmission assets in service during 4Q15, pushing the total for all of 2015 beyond $1bn, Thomas Farrell II, chairman, president and CEO of Dominion, said during the call.
After the call, a Dominion spokesperson told TransmissionHub that some of the projects placed in service during 4Q15 are the Waxpool 230-kV line and substation project in Loudon County, Virginia, a portion of the Brambleton to Mosby 500-kV project in Virginia and the Dooms to Lexington line rebuild project in West Va.
As TransmissionHub reported, Dominion on Feb. 1 said it has agreed to buy Questar in an all-cash transaction valued at about $4.4bn that would expand Dominion’s natural gas operations to include assets in Western states.
Dominion said it would pay Questar shareholders $25 per share, which is higher than Questar’s closing stock price of $20.39 per share on Jan. 29. The purchase price represents about a 30% premium to Questar’s stock price over the previous 20 trading days, Dominion officials noted during the call.
Questar is based in Salt Lake City, Utah, and has gas pipeline, distribution and storage assets, including 3,400 miles of gas transmission pipelines and 56 Bcf of working gas storage. The company serves customers in Utah, Wyoming and Idaho, with about 97% of customer accounts in Utah.
Dominion said the deal would provide enhanced geographic diversity to its existing gas operations, which are in the mid-Atlantic region, with Questar being a principal supplier of gas to Western states.
“Dominion expects the value of the Questar pipeline system to rise over time as Utah and other Western states seek to comply with the requirements of the U.S. Environmental Protection Agency‘s Clean Power Plan and meet state-mandated renewable standards, with increasing reliance on low-carbon, gas-fired electric generation,” Dominion said in a statement.
Defending the purchase price to analysts, Farrell said Questar’s pipeline assets have long-term contracts with credit-worthy counterparties and its gas distribution network features Utah, which has one of the fastest-growing populations in the country.
Dominion has spent a lot of time analyzing the Clean Power Plan and how important gas infrastructure assets will be for compliance in different states, Farrell added. With coal-fired generation dominant in Utah and Wyoming, Dominion believes the pipeline assets of Questar are undervalued, with “a lot of growth opportunities,” Farrell said.
The deal includes the assumption of about $1.6bn in Questar debt, but it will not require any significant leveraging of Dominion’s balance sheet, Farrell said.
Dominion plans to finance the deal using equity, mandatory convertibles and debt at Dominion and equity at Dominion Midstream Partners.
Dominion said the deal would be accretive to Dominion earnings upon closing, which is expected by the end of 2016.
The addition “is well-aligned with Dominion’s existing strategic focus on core regulated energy infrastructure operations,” Farrell said in the Feb. 1 statement.
Questar’s assets “will improve Dominion’s balance between electric and gas operations and provide enhanced scale and diversification into Questar’s regulatory jurisdictions,” Farrell said.
Pending regulatory approvals, Questar would operate as a wholly owned subsidiary of Dominion and maintain its local management structure and headquarters in Salt Lake City, Dominion said.
The deal requires approval from Questar shareholders and clearance from the U.S. Federal Trade Commission, and the companies will file for review and approval, if needed, from the Utah Public Service Commission and the Wyoming Public Service Commission, along with providing information regarding the transaction to the Idaho Public Utilities Commission.
In a separate statement Feb. 1, Dominion reported unaudited GAAP earnings or $357m, or 60 cents per share for 4Q15, compared with $243m, or 42 cents per share, in 4Q14.
Operating earnings, which the company uses as the primary performance measurement, were $416m, or 70 cents per share, in 4Q15, compared with $490m, or 84 cents per share, in 4Q14. The primary differences in operating earnings from GAAP earnings are the inclusion of charges associated with the Virginia State Corporation Commission’s final ruling of Dominion Virginia Power’s base rates and charges associated with future ash pond and landfill closures, Dominion said.
The operating earnings were below Dominion’s guidance range, with the impact of warm temperatures hindering 4Q15 results by at least 8 cents per share, with the temperatures in December 2015 contributing to the warmest winter Dominion has experienced in the past 50 years, Farrell said during the call.
Dominion’s infrastructure growth projects, which include gas pipeline, liquefied natural gas (LNG), gas-fired generation and electric transmission projects, are being developed on time and on budget, Farrell said.
Construction on the Brunswick County generation project in Virginia, a 1,358 MW, combined-cycle facility is about 96% complete, with three turbines firing on natural gas in December for testing and commercial operation expected in mid-2016, Farrell said.
A hearing for a certificate and rate rider of the proposed 1,588 MW Greensville County project was held in January, and that facility is expected to begin service in late 2018, he said.
The Cove Point LNG project was 56% complete at the end of 2015, with service scheduled to begin in late 2017, Farrell noted.