Morningstar | Dominion Proposes Acquiring Outstanding Dominion Midstream Partner Units at Modest Premium
We are reaffirming our $84 fair value estimate and wide moat rating after Dominion Energy announced that it has proposed acquiring the outstanding public units of Dominion Energy Midstream Partners, or DM.The proposed exchange ratio of 0.2468 Dominion shares per DM unit equals $17.75 per unit based on Dominion's closing price on Sept. 18. This represents an 8.2% premium to DM's 30-day average unit price, but is a discount to DM's $18.05 closing price on Sept. 19 before the aftermarket announcement. Dominion owns 60.9% of the common DM units following the June incentive distribution right reset. Dominion's proposed exchange ratio values the 39.1% publicly owned units at almost $900 million.
We view the transaction favorably for two reasons. First, it eliminates the uncertainty with respect to future rate cuts at DM’s pipelines. Second, the transaction strengthens Dominion’s wide moat, as DM’s pipelines and preferred Cove Point position are all wide-moat assets.
The modest premium is consistent with Enbridge and Williams Companies' proposals to acquire their MLPs. Although Enbridge sweetened its offer for the outstanding units of Spectra Energy Partners LP by about 10% last month, the original zero premium offer in May was before the Federal Energy Regulatory Commission clarified its tax policy in July. DM units have partially recovered since July, but are still down 30% since March. Since Dominion’s offer includes the benefit of the revised FERC policy, we think a material revision to the 0.2468 exchange ratio is unlikely.
The announcement to eliminate the MLP structure was not a big surprise. Most of DM’s earnings are from the Carolina Gas, Questar, and Iroquois pipelines with mostly cost-of-service rates and subject to tax at the MLP level under FERC’s new tax policy announced in March. Following the proposed acquisition, Dominion would not have to adjust the pipelines' cost-of-service rates but the pipelines' earnings would be taxable as part of Dominion.
Dominion Energy is a holding company. Through its subsidiaries , the company is engaged in producing and transporting energy. The company's operations are conducted through its subsidiaries: Virginia Electric and Power Company, which is a regulated public utility that generates, transmits and distributes electricity for sale in Virginia and North Carolina; and Dominion Energy Gas Holdings, LLC, which serves as the intermediate parent company for the company's Federal Energy Regulatory Commission-regulated interstate natural gas transmission pipeline and underground storage systems in the eastern and Rocky Mountain regions, as well as for the liquefied natural gas import/export and storage facility.
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