With an eye on optimizing its position in the Marcellus and Utica basins, Williams has purchased the remaining 38% stake in the Utica East Ohio (UEO) Midstream from Momentum Midstream and will take over as operator through a partnership with investment group Canada Pension Plan Investment Board (CPPIB).

Oklahoma-based Williams and CPPIB agreed on Monday to establish a $3.8 billion joint venture (JV) that would include Williams’ Ohio Valley Midstream (OVM) system and UEO. Under the agreement, CPPIB agreed to invest $1.34 billion for a 35% ownership stake in the JV, while Williams would retain 65% ownership and operate the combined business.

“Acquiring the remaining interest in UEO and forming a partnership with CPPIB continues to advance our already strong position in the Northeast,” Williams CEO Alan Armstrong said. “These transactions create a platform for continued optimization and growth, provide deleveraging, reduce capital spending on processing and fractionation capacity for OVM, and unlock further synergies through combined operatorship of the systems.”

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UEO consists of natural gas gathering pipeline/compression, roughly 1 Bcf/d of processing capacity, 160,500 b/d of fractionation capacity and other stabilization/storage/terminalling assets. OVM consists of 216 miles of pipeline (including an ethane pipeline) and 800 MMcf/d of inlet capacity.

Williams plans to use the cash proceeds from the CPPIB buy-in to offset the purchase price of the UEO acquisition, with the balance to fund its extensive portfolio and reduce debt.

“This joint venture will provide CPPIB additional exposure to the attractive North American natural gas market, aligning with our growing focus on energy transition,” said CPPIB’s Avik Dey, head of energy and resources.

The JV complements CPPIB’s recent investment in Encino Acquisition Partners, an anchor customer on UEO and other Williams assets. “Through these unique operations in highly attractive basins, we will further our strategy to establish U.S. midstream exposure alongside highly regarded and experienced operating partners such as Williams,” Dey said.

Raymond James & Associates Inc. analysts viewed the JV as positive, as the Utica acreage turnover has put a more active producer to work in the region. Analysts noted that both OVM and UEO have declined in value as producer activity levels have fallen; Williams purchased OVM for $2.4 billion in 2012 and added to its UEO stake for roughly $2.75 billion in 2015.

Williams is acquiring the remaining UEO stake at a modestly lower rate while still "flipping" the 35% JV interest at a modestly debt-accretive level, analysts said. Williams’ distribution from UEO fell to $70 million last year from $92 million in 2016, reflecting volume declines as legacy producer Chesapeake Energy Corp. focused its efforts on other regions.

Meanwhile, the combination of control/operation of the two proximate systems should allow for opportunities for streamlining costs, while aligning with CPPIB incentives for production/value growth upstream. “All things considered, we view the combination of transactions as positive as Williams will likely modestly improve its leverage ratio as part of the deal,” Raymond James analysts said.

Completion of the JV is expected by the third quarter. Morgan Stanley and CIBC Capital Markets acted as financial advisers to Williams.

Toronto-based CPPIB invests in public equities, private equities, real estate, infrastructure and fixed income instruments independently of the pension plan. At the end of December, the fund totaled C$368.5 billion.