Dominion to Hive Merchant Units

Zacks

Utility operator Dominion Resources Inc. (D) has signed a purchase and sale agreement with a subsidiary of Energy Capital Partners, a private equity firm, to sell three of its merchant power plants.

The units which are earmarked for sale are in Massachusetts, southern Illinois and outside Chicago. The three power stations, namely Brayton Point Power Station, Kincaid Power Station and Elwood Power Station, have a combined generation capacity of 4,110 megawatt (MW). We note that Dominion’s total merchant generation capacity at present is 7,880 MW.

Dominion having decided to sell its merchant generation assets in Sep 2012 was looking for the right buyer. Given the continued economic weakness, we believe the sale of the merchant units is a smart move for Dominion. This would lower the uncertainty of the company to sell electricity in the open markets.  

The sale of these assets is expected to generate after-tax proceeds of $650 million, which Dominion intends to utilize for debt reduction and further develop its regulated business operations.

The transaction is expected to close in the second quarter of 2013, subject to the necessary Federal Energy Regulatory Commission (:FERC) and Hart-Scott-Rodino antitrust clearance.

Dominion’s merchant business is presently operating under challenging market conditions. Exposure to fuel cost volatility impacts the profitability of these units. We believe if the continued weakness in the market persists, the company might decide to  sell more units from its merchant fleet.

Dominion presently has a Zacks Rank #3 (Hold). Other utilities like Otter Tail Corporoatin (OTTR) and Brookfield Infrastructure Partners L.P. ( BIP) are better placed with a Zacks Rank #1 (Strong Buy). We also like Zacks Rank #2 (Buy) The AES Corporation (AES).

Richmond, Virginia based Dominion Resources Inc. was founded in 1909. The company together with its subsidiaries engages in producing and transporting energy in the U.S. With approximately 15,500 employees, the company’s market capitalization is $32.45 billion.

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