Regulators in Rockies set to review Dominion gas utility sale to Enbridge

Dominion Energy Inc. and Enbridge Inc. recently cleared an essential hurdle in Dominion's proposed sale of Questar Gas Co. to Enbridge, as state regulators in Utah and Wyoming approved the corporate reorganization of Questar Gas and related Wexpro entities. With this prerequisite for the eventual sale behind them, the Public Service Commission of Utah and the Wyoming Public Service Commission will soon begin to weigh in on the respective state-jurisdictional applications for approval of the proposed $14 billion acquisition. (Utah Docket No. 23-057-16, Wyoming Docket No. 30010-218-GA-23)

➤ The Enbridge/Dominion deal requires regulators in Utah (UPSC) and Wyoming (WPSC) to review and approve the transaction before completion. The UPSC will examine the proposed deal for net positive benefits and must find it in the public interest prior to approval. The WPSC will determine whether the deal will adversely affect Questar's ability to serve ratepayers. Neither commission is bound by a statutory time frame in which to review the deal.

➤ In September, Dominion submitted applications to the UPSC, WPSC and other jurisdictions to approve two corporate reorganizations to facilitate the eventual sale of the gas utilities. The UPSC and WPSC recently approved the proposed reorganization, simplifying the decision process for the Questar Gas portion of the overall deal.

➤ Under the deal, announced Sept. 5, Dominion will sell three natural gas utilities and other assets to Enbridge. The sale is expected to close in 2024, assuming the requisite state and federal approvals are forthcoming.

Questar Gas serves approximately 1.2 million customers in Idaho, Utah and Wyoming.

Questar Gas' corporate reorganization

On Sept. 8, Questar Gas submitted applications seeking approval of a proposed corporate reorganization with the UPSC and WPSC. The filings stated that the proposed reorganization would help facilitate the sale of the utility to Enbridge by providing transparency and simplicity when the commissions begin reviewing the proposed transaction between Dominion and Enbridge. The formation of the new holding company and corporate structure will streamline the approval process of the various utilities that are part of the overall $14 billion deal since it is anticipated that the utilities will receive decisions at different times. Additionally, the reorganization will streamline Dominion's post-closing corporate tax returns.

Under the now-approved reorganization, Dominion is to create a new holding company, known as Fall West Holdco LLC, with Questar Gas to become a subsidiary of the new entity. Ownership of the Utah and Wyoming utilities would be transferred to Dominion through a dividend in-kind, after which Dominion will directly own 100% of the outstanding and issued shares of the utilities and Wexpro entities — Wexpro Co., Wexpro Development Co., Wexpro II Co., Dominion Energy Wexpro Services Co., Questar InfoComm Inc., Dominion Gas Projects and NYsearch Robotics LLC.

Prior to the reorganization, Questar Gas was a subsidiary of Dominion Energy Questar Corp., which is a subsidiary of Dominion. On Nov. 3, the UPSC approved Questar Gas' request for the corporate reorganization, finding that it will not adversely impact Questar Gas' Utah operations, customers, service or rates. In Wyoming, the commission unanimously approved the proposed reorganization during a Nov. 16 public meeting.

Dominion Energy Gas Distribution LLC subsidiary The East Ohio Gas Co. will remain under Dominion Energy Questar Corp.

Acquisition proposals

Applications were filed with the UPSC and WPSC on Oct. 20. Commitments that are common to both state applications are detailed below; a discussion of state-specific commitments is provided later in this article.

In the applications, Enbridge described itself as the third-largest gas utility in North America by customer count and the largest by volume of natural gas delivered. It expects Questar Gas to benefit from being part of the Enbridge group of companies.

Within the proposed Questar Gas acquisition, Enbridge Quail Holdings (EQ Holdings), which was created explicitly for the sale, will acquire all of the outstanding equity interests in Fall West Holdco, thereby indirectly acquiring all of the equity interests of Questar Gas, the Wexpro companies, Dominion Gas Project Co. LLC and Questar InfoComm Inc. EQ Holdings commits to honoring all Wexpro agreements, stipulations and associated guideline letters.

Enbridge will pay roughly $3 billion in cash and assume debt worth $1.3 billion to acquire Questar Gas from Dominion. The base purchase price is subject to adjustments for cash, indebtedness, working capital and capital expenditures as well as any new regulatory assets and liabilities of Questar Gas arising between July 1, 2023, and the transaction's closing.

The deal will be financed via a combination of a 364-day credit facility and proceeds from other permanent financing sources. Additionally, Enbridge may reinstate its dividend reinvestment and share purchase plan to achieve potential savings in cash dividends or may engage in asset sales.

The applications state that neither EQ Holdings, Questar Gas or Wexpro will incur any new indebtedness or liability for any acquisition debt incurred to finance the sale. Additionally, Questar Gas will refrain from seeking rate recovery of any acquisition premium (goodwill) associated with the deal, and no goodwill will be recorded on Questar Gas' books.

Enbridge commits to ring-fencing its US-regulated utility operations from its other US operations to ensure the financial integrity of these companies, establish clearly understood management and reporting lines, and facilitate operational efficiencies. According to the applications, this structure will "facilitate transparency and local regulatory oversight and review by streamlining and minimizing intracompany affiliate transactions."

Questar Gas will be operated as a separate legal entity from EQ Holdings. The Enbridge subsidiary commits to facilitating operational enhancements and ensuring that Questar Gas has access to the resources, funding and credit needed to support its operations and growth. Questar Gas will also maintain separate long-term debt with its own debt rating supplied by at least two of the three recognized debt rating agencies. Any debt used to capitalize Questar Gas will be kept within the regulated utility. Additionally, per past practices, Questar Gas will have the same access to short-term debt, commercial paper and other liquidity.

The applicants note that if any future dividends are offered, EQ Holdings would continue Questar Gas' practice of setting its dividend rates at levels that maintain Questar Gas' capital structure in an appropriate range. In Questar's most recently completed rate cases, the UPSC approved a capital structure with a 51% equity ratio and the WPSC approved a 55% equity layer; a new case is pending in Wyoming.

Questar Gas commits that no changes will be made to its existing filed rates, rules, regulations and classifications under its existing tariff as a result of the transaction. Transaction costs associated with the acquisition would not be recovered through Questar Gas' rates or through charges from affiliated companies, Enbridge or EQ Holdings to Questar Gas.

Additionally, Questar Gas' books will continue to reflect assets at historical costs, approved depreciation rates and deferred income taxes based on original cost in accordance with the Uniform System of Accounts.

Once the transaction is completed, EQ Holding pledges to provide Questar Gas with funding to meet its ongoing operational needs consistent with past practice and, as necessary, to provide safe and reliable service to all its customers. Additionally, Enbridge will seek to merge its culture of safety, integrity, respect, inclusion and high performance with Questar Gas' existing culture. EQ Holdings also commits to implementing Enbridge's Integrated Management System — which includes safety and risk management programs, processes and procedures — within two years following the close of the transaction.

The applicants anticipate no change to Questar Gas' capital expenditure plans over the next five years, absent a material change in circumstances. Additionally, the utilities will continue to file integrated resource plans annually. Questar Gas will also maintain the established gas-supply interchangeability Wobbe indices for Questar Gas receipt points and comply with commission requirements.

Questar Gas will undertake and explore possibilities for implementing clean energy projects, including renewable natural gas, hydrogen and compressed natural gas, to benefit consumers by helping reduce combustion-related and methane emissions and reducing the carbon intensity of the energy delivered to customers. Such exploration will include assessing federal funding eligibility for any such projects under the US Inflation Reduction Act.

Questar Gas headquarters will, for the foreseeable future, remain in Salt Lake City. Questar Gas will keep all financial books and records at headquarters to be available to the commissions upon request. Questar Gas will continue to be locally managed by a seasoned team of executives with expertise in the retail natural gas utility industry who will be responsible for implementing policies and practices to achieve customer satisfaction, reliable service, public and employee safety, environmental stewardship, and collaborative and productive relationships with customers, regulators, governmental entities, and other interested stakeholders.

EQ Holdings pledges to increase Questar Gas' annual charitable contributions to local communities by $175,000 for three years, relative to the utility's 2022 charitable donations of $1.7 million.

Utah

Once the transaction is completed, Questar Gas will operate under the name Enbridge Gas Utah, which will remain a direct, wholly owned subsidiary of Fall West Holding and continue to exist as a separate legal entity.

"It is [the joint applicants'] firm belief that the transaction will benefit Questar Gas and its customers, and that the transaction is in the public interest and provides a net positive benefit. Enbridge has the necessary financial, technical, and managerial expertise to own and operate Questar Gas. Enbridge is a strong and well-financed company that will strengthen Questar Gas. Enbridge's lasting investment focus means that Enbridge intends to own Questar Gas for the long term – lending stability to, and confidence in, Questar Gas' continued role as a dependable supplier of natural gas service at reasonable rates," the companies said in the application.

In its review, the UPSC will examine the proposed deal for net positive benefits and must find it in the public interest prior to approval. There is no statutory time frame within which the commission must decide on a merger or acquisition application.

The UPSC issued a scheduling order on Nov. 7, specifying that nonapplicant testimony is due Feb. 5, 2024; rebuttal and surrebuttal testimonies are due March 4 and March 29, 2024, respectively; and hearings are scheduled for April 11, 2024.

The UPSC set Feb. 12, 2024, as the deadline for parties to intervene. On Nov. 8, the Utah Association of Energy Users, representing the interests of large utility consumers — including Questar gas transportation and/or sales customers — petitioned the UPSC to intervene in the proceeding.

Wyoming

Once the transaction is completed, Questar Gas will operate under the name Enbridge Gas Wyoming, which will remain a direct, wholly-owned subsidiary of Fall West Holding and continue to exist as a separate legal entity.

State law says the WPSC "shall not approve any proposed reorganization if the commission finds ... that the reorganization will adversely affect the utility's ability to serve the public." There is no statutory time frame within which the WPSC must decide on a proposed merger.

Interested parties who wish to file a statement, intervention petition, protest or request for a public hearing have until Dec. 7. On Oct. 20, the Wyoming Office of Consumer Advocate notified the commission that it would participate as a party in the proceeding.

Deal overview and additional information

On Sept. 5, Dominion announced plans to sell its East Ohio Gas, Public Service Co. of North Carolina Inc. (PSNC) and Questar utilities to Enbridge for $9.4 billion in cash plus the assumption of $4.6 billion of debt. Enbridge will also acquire Wexpro Co., which develops and produces gas reserves, from Dominion.

The sales are part of Dominion's ongoing strategic review launched in late 2022, which thus far has not appeared to appeal to the company's shareholders; Dominion shares have lagged the S&P 500 Utilities throughout much of 2023, and the stock has fallen to consecutive 52-week lows since the deal was announced.

While Questar Gas operates in Idaho, pursuant to state code, the Idaho Public Utilities Commission (PUC) does not have authority over the sale of gas utilities at the holding company level. Dominion notified the Idaho PUC in Case No. QST-G-23-01 of the pending acquisition, as required by a 2016 PUC order approving Dominion's acquisition of Questar Gas.

In addition to the UPSC and the WPSC, the deal is subject to review by the North Carolina Utilities Commission (NCUC). In NCUC Docket No. G-5 Sub 667, PSNC and Enbridge Parrot Holdings LLC filed a joint application on Oct. 20, requesting approval of Enbridge's proposed acquisition of Fall North Carolina Holdco LLC from Dominion for $2.2 billion in cash plus the assumption of debt worth $1 billion. Prior to filing its application with the NCUC, in Docket G-5 Sub 664, PSNC filed a proposal under which SCANA Corp. would distribute all of its interests in PSNC to Dominion, which would then contribute that interest into Fall North Carolina Holdco, a wholly owned direct subsidiary of Dominion. On Oct. 26, the NCUC Public Staff filed recommended that the commission find the reorganization to be in the public interest and approve the proposal. The commission is set to issue a decision in the proceeding on Nov. 20.

It is unclear whether the Public Utilities Commission of Ohio will review the transaction. Dominion and Enbridge notified the Ohio PUC on Oct. 20 that they do not believe the proposed transaction requires commission approval. The companies submitted their filing so the PUC "may elect whether to review the transaction and any impacts it might have on [East Ohio Gas] or its customers under its general supervisory authority." The commission has declined to formally review similar transactions in the past. Enbridge will pay roughly $4.3 billion in cash and assume $2.3 billion of debt to acquire East Ohio Gas Co. from Dominion.

At the federal level, the transaction is also subject to the expiration or termination of the waiting period under the Hart-Scott-Rodino Act and review by the Federal Communications Commission.

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