Dominion (D) - Get Report said it will pursue the sale of most of its oil and natural gas exploration and production assets to put additional focus on growing its electric generation and energy distribution, transmission, storage and retail businesses.
The Richmond, Va., power generator said the move is designed to enhance long-term value by realigning Dominion's operations and risk profile more closely with the company's peer investment group of utilities.
As part of the repositioning, Dominion would retain its low-risk Appalachian Basin properties because of their value to the company's natural gas pipeline, storage and gathering businesses. The Appalachian properties account for approximately 17% of proved reserves and 8% of Dominion's average daily production as of Sept. 30. These reserves would produce less than 5% of Dominion's consolidated future operating earnings upon completion of any sale.
Proceeds from any sale would position Dominion to reduce debt, including debt at its CNG subsidiary, as well as to repurchase shares and/or to acquire assets that strengthen its remaining businesses. Following the sale, the remaining businesses should grow consolidated operating earnings at a rate of 4% to 6% annually while reducing the volatility of earnings.
Also following any sale, Dominion expects to maintain its existing targets for credit metrics. The company believes that this, combined with a lower business-risk profile, will enable it to maintain or improve its credit ratings at both Dominion and CNG.
"Our strategic review has determined that the best long-term course for Dominion is to place greater emphasis on our traditional utility businesses, which will account for about 64% of our income this year," said CEO Thomas Farrell. "We are very good at managing these businesses safely and efficiently, and we are widely considered to have very talented and skilled employees and one of the best sets of assets in the country.
"Equally important, these are the businesses that provide the balance of risk and reward with which our traditional shareholder base appears to be most comfortable. By redeploying net cash proceeds to debt reduction, stock buybacks and expansion of our remaining businesses, we believe that shareholders would see solid, reliable growth from a complementary set of assets.
A formal sales process will begin in mid-February 2007 after the reserve audit for 2006 is completed. Closing is targeted to occur by mid-2007.
"The premier quality of our E&P reserves and operations is expected to produce significant interest among potential bidders," Farrell said. "These operations have a demonstrated track record of solid growth in reserves and production at top-quartile finding and development costs. It is rare that a business of this size and quality becomes available.
"Following a sale, our remaining E&P reserves of about 1.1 trillion cubic feet equivalent would fit well geographically and operationally with our natural gas pipeline, storage and gathering businesses. They have a risk profile more consistent with the risk profile of Dominion's other businesses."
Dominion has engaged the investment banking firms of JP Morgan, Lehman Brothers and Juniper Advisory LP with respect to the potential sale. Merrill Lynch is advising Dominion on market perception of existing and future activities. BakerBotts LLP and McGuireWoods LLP are the company's legal advisers for the potential sale.