Virginia-based utility company Dominion Energy Inc. plans to sell Questar Pipeline Co. to Southwest Gas Holdings Inc. in a deal valued at $1.975 billion, the companies said Oct. 5.

The transaction, targeted for close in the fourth quarter, encompasses transportation and underground storage assets in Utah, Wyoming and Colorado and includes $430 million of existing debt, the announcement said. In announcing the transaction, Dominion noted that off-loading these assets would position the company to focus more on its energy transition strategy.

"This transaction represents another significant step in our evolution as a company, allowing us to focus even more on fulfilling the energy needs of our utility customers and continuing growth of our clean-energy portfolio," Robert Blue, Dominion Energy chair, president and CEO, said in a statement.

The deal is subject to regulatory approvals.

Activist investor opposition

Activist investor Carl Icahn came out in opposition to Southwest Gas' purchase of Questar prior to the deal's formal announcement, saying the transaction would drastically decrease shareholder value and exacerbate existing problems at the gas utility operator.

"During the past few years, management of SWX has made a number of egregious errors at the expense of shareholders," Icahn said in an Oct. 4 letter to the Southwest Gas board that was made public in an Oct. 5 filing. "However, the purchase of Questar you are currently being rumored to make at the price you are willing to pay will make all past errors pale in comparison. The purchase will result in serious diminution of shareholder value."

Icahn sought confirmation of the rumored deal in the letter after Reuters published a news report Oct. 3 saying Southwest Gas and Questar were in M&A discussions.

Southwest Gas did not immediately respond to requests for comment on Icahn's letter. The company's stock price popped in morning trade after The Wall Street Journal reported on the letter. Shares were up nearly 7% after sinking in the previous day following the Reuters report.

In the Oct. 5 proxy statement, Icahn revealed a substantial holding in Southwest Gas through entities that he controls. The entities own nearly 2.9 million shares of the company's common stock, or 4.9% of outstanding shares based on the total shares outstanding as of July 30. The entities purchased 1,269,350 shares for an aggregate price of $90.2 million and entered into forward contracts for the remaining 1,629,326 shares at an approximate aggregate forward price of $102.6 million.

Icahn sees 'many problems' at Southwest Gas

Icahn said the company's strategy of acquiring nonregulated assets while peers focus on regulated utility operations shows that the board has not provided proper oversight of strategic M&A. Southwest Gas operates two chief business segments: the Las Vegas-based Southwest Gas Corp. regulated gas distributor and the unregulated Centuri Group Inc. energy construction services company.

While a Questar deal would expand Southwest Gas' regulated business, Icahn said it was nevertheless another sign of failed oversight, based on the reported deal price. Icahn further said the company should not be embarking on a major new investment in light of the "many problems" he sees in the company and, in his view, leadership's inability to manage and control its existing operations.

By filing for inappropriate expenses and disregarding regulators, Southwest Gas has allowed its relationship with the Nevada Public Utilities Commission to deteriorate over several years, Icahn alleged. Recent regulatory cases have produced disallowed expenses and denied trackers, Icahn added.

General and administrative expenses have increased materially since 2016, leading to "immeasurable" damage resulting from loss of trust with regulators, Icahn said. Icahn alleged the strained regulatory relationship and "runaway" general and administrative expense has contributed to a depressed 7.1% return on equity. That ROE, combined with recent M&A, has weighed on Southwest Gas' credit profile, Icahn added, citing rating agency commentary.

Icahn also complained that executive compensation has increased while Southwest Gas' stock has underperformed peers' share price and the broader market. The investor also found fault with the board, noting that seven of nine independent directors have served for an average of 13 years.

"Stagnant boards often fail to implement changes, ask tough questions, and hold management accountable," Icahn said.

Icahn maps out path to shareholder value

Icahn said there is significant opportunity for both shareholders and ratepayers if the company improves accountability. He said the company's stock price could appreciate roughly 75% from about $63 per share at the time of writing. The company's industry-leading customer growth and ability to transition to hydrogen transportation through a distribution system largely composed of modern plastic pipe could generate further upside, he added.

The regulated utility business and utility services segment could be worth $53 per share and $36 per share, respectively, in Icahn's view. By improving its cost structure and repairing regulatory relationships, Southwest Gas could increase ROE and drive $15 per share of value. A better working relationship with regulators could also allow Southwest Gas to include certain projects in rate base, representing value of $8 per share, he said.

In July, Dominion announced it would look for a different buyer for Questar after a planned sale to Warren Buffett's Berkshire Hathaway Energy was scrapped over potential problems with antitrust rules. The sale originally included about $9.7 billion of Dominion's gas transmission and storage business assets in July 2020. Most of the deal went through in November 2020 with the exception of Questar. Excluding the other gas transmission and storage business assets, Berkshire Hathaway was willing to pay $1.3 billion for Questar.

Questar's main asset, the Questar pipeline, is a 2.5-Bcf/d interstate gas pipeline that transports gas through Utah, Wyoming and Colorado. The Questar assets included the region's largest underground storage reservoir, the Clay Basin storage facility on the Wyoming-Utah border.