Dominion Energy (NYSE:D) announced this week that it has offered to acquire its master limited partnership (MLP), Dominion Energy Midstream Partners (NYSE: DM), in an all-stock deal. The transaction is the latest in a string of similar deals where corporate parents are buying out their MLPs in the aftermath of an adverse policy change earlier in the year. By giving up on its MLP, Dominion will need to take an alternative route to obtain the necessary funding for its expansion plan.
Another one bites the dust
Dominion Energy has offered to acquire all the outstanding units of Dominion Energy Midstream that it doesn't already own for $17.75 apiece. At the current exchange ratio, the deal values the MLP at an 8.2% premium to its trading price over the last 30 days.
Dominion Energy CEO Thomas Farrell said this about the deal:
Continued weakness in MLP capital markets combined with the prolonged disruption in Dominion Energy Midstream's (DM) common unit price since the March 15 Federal Energy Regulatory Commission policy revision were key factors that led to this decision... The proposed transaction would provide a premium to recent market trading levels for DM common unit holders and also benefit Dominion Energy shareholders by removing uncertainty as to the future of DM and the potentially negative impact of changes in FERC tax policy to the future cash flows of current DM assets.
In making this offer, Dominion joins pipeline giants Williams Companies (NYSE:WMB) and Enbridge (NYSE:ENB) in buying out their MLP due to the FERC ruling. Williams agreed to a deal to acquire its MLP in May, offering a slight 6.4% premium to seal the deal, which closed early August. While the FERC ruling played a role, Williams also saw the deal as simplifying its corporate structure, improving its credit profile, and increasing the amount of cash it retains to fund expansion projects.
Enbridge also offered to roll up its MLPs, Spectra Energy Partners (NYSE: SEP) and Enbridge Energy Partners (NYSE: EEP) -- as well as two other sponsored vehicles -- in May, though its initial deal came at no premium. After some negotiation, Enbridge agreed to buy Spectra Energy Partners at a 9.8% premium in August while agreeing to pay 8.7% more for the units of Enbridge Energy Partners it doesn't already own earlier this week. The fact that Enbridge and Williams were able to work out deals with their MLPs after offering them a small premium suggests Dominion should be able to reach an agreement with Dominion Energy Midstream quickly.
Taking a new path to achieve its growth strategy
Dominion Energy initially expected to haul in $7 billion to $8 billion in cash from Dominion Energy Midstream Partners through 2020 by collecting its steadily growing cash distribution as well as by dropping down assets to that entity. Those funds would enable the utility to pay down debt, buy back stock, and invest in growth projects. However, with that funding source going away, Dominion needs a new path.
The company anticipates that the transaction will be neutral to its earnings guidance and credit profile. That's because "Dominion Energy has already successfully completed several steps that will allow us to achieve our earnings and credit objectives," according to Farrell. The company sold more than $2 billion in equity using three separate methods and also secured a $3 billion term loan supported by its Cove Point Liquefied Natural Gas export terminal. Meanwhile, the company put two gas-fired power plants on the market and is also seeking buyers for its stake in Blue Racer Midstream, which could bring in between $1 billion to $1.5 billion.
Those initiatives have helped improve Dominion's balance sheet and credit profile, putting it in a stronger position to fund the $11.4 billion of capital projects it expects to complete over the next three years. Those expansions are key to the company's ability to achieve its forecast to grow earnings at a 6% to 8% annual rate through 2020.
Same destination, different route
Dominion had high hopes for its MLP when it created that entity a few years ago. However, when a policy change cut into the cash flows that Dominion Energy Midstream would earn on certain pipelines, Dominion quickly took steps to secure alternative funding sources. Because of that, the company can abandon its MLP-driven growth plan and still reach the same destination, which will see it grow earnings at a high single-digit annual pace for the next few years.