Dominion Resources Inc (D.N) said it would buy Questar Corp (STR.N) for about $4.4 billion in cash, the latest power producer to bet on stable revenues from natural gas distribution at a time when power demand is waning.
The deal is the third in a series of mergers between power producers and gas utilities, which are benefiting from a glut of shale gas and federal regulation that mandates the use of the fuel in power generation.
Duke Energy Corp (DUK.N), the largest U.S. power company by generation capacity, said in October it would buy Piedmont Natural Gas Co (PNY.N) for $4.9 billion, while Southern Co (SO.N) announced an $8 billion deal for AGL Resources Inc GAS.N in August.
Dominion on Monday also reported a fourth-quarter profit that missed analysts' average estimate, hurt by weak power demand due to the milder-than-normal weather.
Dominion's $25-per-share offer represents a premium of nearly 23 percent to Questar's Friday close.
Questar's shares were trading at $24.94 in early afternoon, while Dominion's shares were down about 1 percent at $71.18.
Morningstar analysts called the deal "cheap", noting that the price was 19 times Questar's 2016 earnings, compared with similar transactions over the past two years that averaged 24 times forward earnings.
Dominion will assume $1.6 billion of Questar's debt as part of the deal, which will immediately add to earnings, Dominion executives said on a conference call.
With Questar's acquisition, Dominion will get about 27,500 miles (44,250 km) of gas distribution pipelines, 3,400 miles of gas transmission pipeline and 56 billion cubic feet of working gas storage.
The combined company will serve 2.5 million electric utility customers and 2.3 million gas utility customers.
Questar will operate as a unit of Dominion after close, expected by the end of 2016.
The company's pipeline assets will be dropped into Dominion's master limited partnership, Dominion Midstream Partners LP, after the deal closes, executives said.
RBC Capital Markets LLC and Mizuho Bank Ltd were Dominion's financial advisers and McGuireWoods LLP its legal counsel.
Goldman Sachs & Co (GS.N) advised Questar, while Kirkland & Ellis LLP provided legal counsel.
(Reporting by Swetha Gopinath and Anet Josline Pinto in Bengaluru; Editing by Maju Samuel and Sriraj Kalluvila)