The Questar merger
Dominion Resources (D) announced its merger with Questar (STR) during its 4Q15 earnings release. The deal is worth $4.4 billion. It’s supposed to be completed by late 2016, subject to regulatory approvals. Questar will become a wholly owned subsidiary of Dominion Resources when the merger is finalized. The Dominion-Questar combination is expected to raise Dominion’s earnings for 2017.
Why Dominion went for Questar
Questar is a regulated natural gas distribution company with operations in Utah, Wyoming, and Idaho. It serves nearly 1 million customers with approximately 97% of them in Utah. Questar’s customer base growth rate averages 2.5%, which is well above the industry average. Regulators in Questar’s operational zones have allowed returns on equity of 9.5%–9.9% on its $1.1 billion rate base. It’s the return that utilities are authorized by regulators to gain from their invested capital in a particular region.
Questar’s operating assets consist of nearly 27,500 miles of gas distribution pipeline, 3,400 miles of gas transmission pipeline, and 56 billion cubic feet of natural gas storage.
The Dominion-Questar combination will place Dominion in a better place to expand its energy portfolio. The combination also brings geographical diversification to Dominion’s gas distribution operations, with services expanding to Western natural gas markets. The deal may enhance Dominion’s regulated operations, which will further stabilize its earnings in the future.
Investors can get a passive exposure to utilities by investing in the Utilities Select Sector SPDR ETF (XLU). Dominion Resources makes up 7.6% of XLU. NextEra Energy (NEE) and Duke Energy (DUK) are some of the top holdings in XLU, forming ~8.5% each.