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Dominion Drops Down Questar Pipeline to MLP in $1.725B Deal

Dominion Resources Inc. on Monday said Dominion Midstream Partners LP, its affiliated master limited partnership (MLP), will acquire Questar Pipeline LLC in a $1.725 billion drop-down that is expected to close Dec. 1.

Dominion Midstream will finance the transaction through a combination of debt and equity offerings, and by assuming $435 million in debt from Questar Pipeline.

The MLP’s equity offerings announced Monday include: a public offering of common units representing limited partner interest in Dominion Midstream; commitments from a group of institutional investors for $137.5 million of common limited partner units; as much as $600 million in privately issued convertible preferred units representing limited partner interest; and common units and preferred units issued to Dominion.

Dominion Midstream will also tap a group of banks for a $300 million term loan in order to pay off an existing term loan currently provided by Dominion.

Questar Pipeline, acquired by Dominion after securing needed regulatory approvals over the summer (see Daily GPI, Aug. 24), operates regulated natural gas transmission and storage assets in Colorado, Utah and Wyoming. Dominion said the close of the transaction will be immediately accretive to the MLP’s distributable cash flow (DCF) and supportive of its growth targets.

Dominion said it will use the proceeds from the dropdown to retire debt.

"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 [see Daily GPI, Feb. 1],” Dominion CEO Thomas Farrell said. “The capital generated from the Questar Pipeline dropdown will allow Dominion to pay down debt while supporting its earnings and dividend growth targets. The dropdown will also provide Dominion Midstream with additional earnings to support its best-in-class growth rate, without another asset drop or additional equity, until the second half of 2018.

"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% per year."          

Dominion and Dominion Midstream also reported earnings for 3Q2016 Monday. Dominion Midstream posted revenue of $85 million for the third quarter, compared with $103.1 million in the year-ago period.

The MLP reported net income attributable to the partnership of $24.3 million (30 cents/unit) for 3Q2016 and DCF of $24.1 million. That’s compared with net income of $18 million (28 cents/unit) and DCF of $18.5 million in the year-ago quarter.

During a conference call with analysts Monday, Dominion management provided updates on some of the utility’s major natural gas infrastructure projects, including its Cove Point liquefied natural gas (LNG) terminal and the joint venture Atlantic Coast Pipeline LLC.

The Cove Point project is now 75% complete and remains on track for a late 2017 start-up date, Farrell said.

Meanwhile, the Marcellus Shale-to-Southeast Atlantic Coast Pipeline LLC, and its related Supply Header project, are now expected to be completed in late 2019, he said. This represents a delay from Dominion’s original target of 4Q2018, with Farrell recently acknowledging the need to push back the in-service date based on a prolonged environmental review timeline from FERC (see Daily GPI, Sept. 22).

Federal regulators continue to scrutinize the 600-mile, 1.5 Bcf/d Atlantic Coast, with the U.S. Forest Service recently expressing concern over the potential for the pipeline to cause erosion in its traversal of mountainous terrain in West Virginia and Virginia (see Daily GPI, Oct. 27).

Dominion, which operates regulated gas and electric utilities in addition to its natural gas storage and transmission assets, reported operating revenue for the third quarter of $3.132 billion, compared with $2.971 billion in the year-ago quarter.

The company reported net income for the quarter of $690 million ($1.10/share), compared with $593 million ($1/share) in the year-ago quarter.

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