Dominion Resources, Dominion Midstream Announce $1.7 Billion Drop-Down Deal

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Dominion Resources Inc. (NYSE: D) and Dominion Midstream Partners L.P. (NYSE: DM) announced Monday that the midstream master limited partnership (MLP) will acquire Questar Pipeline from Dominion for total consideration of $1.725 billion, including Questar debt. The acquisition is expected be become effective December 1, 2016.

Dominion Midstream also announced Monday morning that it has priced its public offering of 13.5 million common units at $23.20 per unit. The underwriters have an option on an addition 2 million common units. The offering is expected to close November 3. Proceeds from the offering will be used to fund part of the Questar purchase price. The MLP will assume $435 million in Questar debt as part of the acquisition.

A group of institutional investors, including Stonepeak Infrastructure Partners has agreed to take $137.5 million in common units and up to $600 million in convertible preferred units. Dominion will be issued an unspecified number of common units and Dominion Midstream will take a term loan of $300 million to repay an existing loan from Dominion.

Upon closing, the transaction is expected to be immediately accretive to Dominion Midstream’s distributable cash flow and to support the MLP’s intention to grow distributions to unitholders at a compound annual growth rate of 22% per year. The deal is also expected to double Dominion Midstream’s adjusted EBITDA, allowing the company to delay further acquisitions or equity issues until the second half of 2018. Preferred units will pay a distribution of 4.75% for two years and the greater of 4.75% and the amount the preferred units would have received if they had been converted into common units.

Preferred units generally will be convertible into common units at a price reflecting a premium of about 15% to the pricing of the public offering of common units on a one-for-one basis after two years, at the purchasers’ option, and after three years at Dominion Midstream’s option, subject to certain conditions.

Thomas F. Farrell II, chairman, president and chief executive officer of Dominion and chairman and CEO of Dominion Midstream, said:

Dominion Midstream’s planned acquisition of Questar Pipeline and related financing have been anticipated as part of the financing structure of the Dominion-Questar Corporation combination since it was announced in February 2016. The capital generated from the Questar Pipeline dropdown will allow Dominion to pay down debt while supporting its earnings and dividend growth targets. …

This successful financing also validates our business plan for Dominion Midstream, which involves accessing the capital markets to fund the acquisition of midstream assets to support the partnership’s stated intention to grow distributions by 22 percent per year.

Dominion stock traded up about 3.2% Monday morning, at $75.82 in a 52-week range of $64.54 to $78.97. The 12-month consensus price target on the stock is $79.07.

Dominion Midstream’s common units traded down about 2.5%, at $23.30 in a 52-week range of $23.12 to $35.88. The consensus price target on the units was $34.25 before the announcement.

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