Dominion Fishes Deals Upstream and Down
Fanning the flames of the convergence-consolidation bonfire,
Dominion Resources (DRI) last week announced two planned
acquisitions that would add both wellheads and burner tips, not to
mention assets in between.
Last Monday Dominion said it would acquire Consolidated Natural
Gas (CNG) in a $6.3 billion stock deal to form the country's fourth
largest electric and gas utility, serving nearly 4 million retail
customers in five states. Two days later Dominion Resources
subsidiary Dominion Energy announced a $34 million (C$50 million)
cash offer for Remington Energy Ltd., a publicly traded gas E&P
company headquartered in Calgary, AB.
The combination of Dominion and CNG would have all the markings
of gas-power convergence. "CNG has got gas in the ground. They've
got the way to move it, and they've got gas customers. We've got
electric generating assets. We've got the way to move it, and we've
got electric customers," touted Thomas E. Capps, DRI CEO. "I don't
believe any of these other convergence [deals] put together gas and
With deregulation, the companies are hoping to make existing gas
customers into electric customers and vice versa. Dominion and CNG
already have overlap of about 180,000 customers in Virginia's
Tidewater area. "It's going to give us a chance to cross-sell. It's
also going to give us a chance in the morning to wake up and say,
'What are we going to do with that gas? What's the most profitable
thing to do? Is it to sell it? Is it to put it in storage, or is it
to generate electricity with it?'"
Capps, who will be CEO of the combined company, told reporters
during a conference call the company will not be a "trading"
company. "We will build merchant plants and we would like to tie at
least a part of these plants up under contract. We are not going to
build a lot of generation to sell into the market and just
speculate with it, although we will do some of that." Initially,
merchant plant efforts will be focused on the ECAR and PJM NERC
regions, Capps said.
Dominion's future has brightened with the CNG deal, noted
Merrill Lynch & Co. analyst Donato Eassey. "You can't replicate
these assets at any cost. To talk about a price-to-book [value] is
almost irrelevant." The deal's only down-side in Eassey's view is
the potential for regulatory delay. Mega-mergers among
non-regulated companies seemingly are done at the drop of a hat
compared to deals where parties must answer to regulators. Eassey
didn't rule out another party coming in to court CNG. "I think the
market will determine that." And he expects more big deals like
this down the pike. "This has been a cost-plus regulatory compact
for years, and all of a sudden when you open it up to competition
the waste and inefficiencies are exposed, and that's what's
"I think if you're an electric guy you look around at the
options that you have, and you say this makes a pretty smart fit."
Eassey said he thinks the prices paid in gas-power convergence
deals will continue to climb.
Richmond, VA-based Dominion Resources is made up of Virginia
Power/North Carolina Power, Dominion Energy, and Dominion Capital.
Its Virginia-North Carolina utility is ranked among the electric
industry's 10 largest utilities, serving more than 2 million
customers from the northern Virginia suburbs of Washington, D.C. to
northeastern North Carolina's Barrier Islands. Dominion Energy has
ownership and operating interests in 24 generating facilities and
has about 715 Bcfe of proven reserves in key gas-producing regions
of the U.S. and Canada with annual production exceeding 95 Bcf.
Wellhead to Burnertip, Plus Storage
Pittsburgh, PA-based CNG has distribution, retail energy
marketing, exploration and production, transmission and storage,
and international operations. CNG's four local distribution
companies serve nearly 2 million customers. They are East Ohio Gas,
The Peoples Natural Gas, Virginia Natural Gas, and Hope Gas.
CNG Producing set records for production and reserve additions
in 1998. The company produced 157.5 Bcf of gas and 7.9 million
barrels of oil while adding 413 Bcfe of reserves, bringing total
reserves to 1.7 Tcfe. CNG also has a 7,600-mile interstate gas
pipeline network serving markets in the Northeast, Mid-Atlantic,
and Midwest. And CNG operates the largest gas storage system in
North America with working capacity of 435 Bcf. The CNG/Sabine
Center is a market center hub operated jointly by CNG and Texaco.
When completed, the deal will create a fully integrated electric
and gas company in the United States with about $8.8 billion in
revenues, $23.9 billion in assets, annual cash flow exceeding $2
billion, and 17,000 employees. The combined company will have an
energy portfolio of more than 20,000 MW of power generation, 2.4
Tcfe in gas and oil reserves producing nearly 300 Bcfe annually.
Market capitalization of Dominion-CNG will exceed $25 billion.
Terms say DRI will acquire all CNG shares for 1.52 DRI shares each.
Based upon DRI's closing Feb. 19, this represents a premium of
25.3% over the average CNG closing price during the 20 trading days
ended Feb. 19. CNG stockholders will own about $6.3 billion of DRI
stock, about 43% of the combined company. The combination is
expected to be accretive to earnings per share by the end of its
The combined company will be named Dominion Resources and be
headquartered in Richmond. The gas distribution, pipeline and
storage operations will continue to be headquartered in Pittsburgh.
The companies anticipate regulatory procedures can be completed in
about 12 months.
In a research note issued last Monday, PaineWebber said, "Given
our continued belief that the natural gas and electricity
industries will continue to converge (and likely at a faster pace
given today's announcements), we continue to recommend accumulating
positions in various names which have solid fundamentals, are
trading at historically low valuations and have highly attractive
asset portfolios ripe for acquisition." The names include El Paso
Energy, Columbia Energy, The Coastal Corp., and Washington Gas
Last week also saw Dominion subsidiary Dominion Energy's
announcement it will buy Remington Energy Ltd. of Calgary, AB.
Including assumed debt, the deal has a total value of about $261
million (C$390 million). Dominion Energy, the power and natural gas
subsidiary of DRI, will have North American reserves exceeding 1
Tcfe including Remington. Production will exceed 350 MMcfe/d.
Low Oil Prices Foster Deal
In December Remington, laden with debt and foundering on weak
oil prices, said it retained FirstEnergy Capital Corp. to assist in
the possible sale of the company. Remington had a loss for the
nine months ended Sept. 30, 1998 of $2.2 million compared to
earnings of $4.9 million for the prior-year period.
The addition of Remington to Dominion Energy's portfolio will
represent the company's second expansion into the Western Canadian
Sedimentary Basin. Last year, Dominion Energy acquired 100% of
Archer Resources Ltd., which now operates under the name Dominion
Energy Canada Ltd.
"When we combine this planned acquisition with our acquisition
last month of San Juan Partners, Dominion Energy increases its
proved reserves to more than 1 Tcfe and boosts daily production by
50%," said Dominion Energy CEO Thomas N. Chewning. "Viewed as part
of Dominion Resources' planned combination with Consolidated
Natural Gas, our onshore reserve base will serve to balance the
offshore reserves developed by CNG under its highly successful
program. Our combined companies will own reserves with geographic
and geological diversity."
G.E. Lake Jr., senior vice president-oil and gas operations of
Dominion Energy, said with Remington "we are acquiring significant
future development potential and adding a second core area of
operations to our existing growth platform in Canada."
The Remington deal gives Dominion a holding in the Alliance
Pipeline and moves the company into northeast British Columbia, a
major gas supply region. The deal fits into CNG's strategy,
articulated last week by CNG CEO Davidson. "We are going ahead with
our E&P expansion and the budget increases there and are very
aggressively pursuing reserves at this time, not only through the
drillbit, but also purchasing reserves. We feel this is a perfect
opportunity with prices down, with many independent producers
having to back off their drilling programs, with many independent
producers having to sell assets, energy in the ground, just to meet
Joe Fisher, Houston