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EQT Dropping LDC for Midstream, E&P
Now that it’s getting out of the local distribution company (LDC) business, Appalachia-focused EQT Corp. will have more time and money to devote to the Marcellus Shale, America’s emerging natural gas breadbasket.
On Thursday SteelRiver Infrastructure Partners, owner of Peoples Natural Gas, said it is acquiring Equitable Gas Co. LLC from EQT in exchange for $720 million and “select midstream assets and commercial arrangements” in the Marcellus Shale region. EQT had been expected to jettison the LDC business, but the deal came sooner than at least one analyst expected; all the better, he said, as it removes a distraction for management and investors.
Wells Fargo Securities analyst Gordon Douthat said the sale “creates a cleaner story for investors, funds [a] capex gap in 2014 while allowing for acceleration in the Marcellus.”
EQT Investors cheered the deal, sending the company’s shares up nearly 4% to close at $59.17 Thursday afternoon. Volume was more than three times the average as the stock traded close to the high end of its 52-week range of $43.69-62.74.
EQT said the midstream assets it is to receive from Peoples will generate at least $40 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) per year. The company also said it was cutting its dividend to 12 cents/share to reflect the character of its two remaining core businesses: midstream and exploration and production.
“Today’s announcement allows us to focus on and reinvest in our rapidly growing natural gas production and midstream businesses,” said EQT CEO David Porges. “The proposed transaction provides capital to accelerate the monetization of our reserves beyond 2013 and also adds to our Marcellus midstream assets.”
EQT is to receive about 200 miles of regulated transmission pipelines, as well as four storage pools that have a total of 15.1 Bcf working gas capacity. These assets are located across multiple counties in Pennsylvania and connect to EQT’s existing transmission assets, which will increase the company’s transportation and storage capabilities, EQT said.
Peoples Gas has also agreed to enter long-term contracts for gas transmission, supply and storage services with EQT, and these agreements will secure supply of local Marcellus gas of approximately 35 Bcf per year to Peoples.
Moody’s Investors Service placed the “Baa2” senior unsecured ratings, the “Prime-2” commercial paper rating and other ratings of EQT under review for downgrade. The outlook was previously “negative.” The action was in response to the Equitable transaction and for “existing high leverage and challenging fundamentals” in EQT’s exploration and production business, Moody’s said.
“The announced transaction represents EQT’s final step in its long transition to an independent exploration and production company,” said Moody’s Vice President Pete Speer. “EQT’s concentration in natural gas and elevated financial leverage was already pressuring its ‘Baa2’ ratings, so the announced sale of its lower-business risk gas utility operations makes a rating downgrade likely.”
Porges told financial analysts during a conference call Thursday that the company is “comfortable” with whatever credit rating it winds up with. “We’re going to let the rating process play out,” he said. “I think S&P [Standard & Poor’s] will be a little more positive than Moody’s…We really have no concerns about certainly being able to serve our debt obligations.”
The CEO said the Equitable Gas business had become less important over time to the credit ratings agencies as EQT’s overall business has grown. Moody’s gave a nod to EQT cost efficiencies on the E&P side of its business but let it be known that the LDC will be missed.
Moody’s said EQT has a “very low cost structure” relative to its E&P company peers, which helps to generate returns in a weak natural gas price environment. “Its credit profile benefits from the ownership of strategic transportation and storage assets that enables its growing production to reach the market at low costs,” Moody’s said.
“EQT’s rating has also been supported by its LDC operations, which have provided earnings stability, a lower business risk profile and knowledge of the local regulatory environment that have benefited its production and midstream segments. These positive attributes had served to mitigate the risks of the company’s limited geographic and basin diversification and much smaller production scale relative to other investment grade-rated independent E&Ps.”
Peoples said adding Equitable to its existing LDC system “will greatly benefit the western Pennsylvania community, and beyond, by creating significant operational efficiencies and by enhancing the safety and reliability of the system.”
Equitable Gas provides LDC services to 275,000 customers in Pennsylvania, West Virginia and Kentucky, and owns about 4,000 miles of pipeline. Peoples Natural Gas and its sister company, Peoples TWP, serve about 420,000 homes and businesses in 18 western Pennsylvania counties. Both companies are based in Pittsburgh. The deal is subject to state and federal regulatory approvals.
“This agreement involves two longstanding western Pennsylvania energy companies working together to embrace our strengths and build the best future we can for our customers, our region and our nation,” said Peoples CEO Morgan O’Brien. “The combined utility will yield substantial benefits to the western Pennsylvania community by creating significant operational efficiencies, relative to the pipeline systems; promoting greater competition for gas marketers; and continuing to support local gas producers.
“Combining the companies’ respective pipeline systems will result in a more streamlined and efficient operating system for customers. Furthermore, the greater aggregation of customers will be more attractive to marketers and is expected to attract more marketers that will create greater competition for customers’ supply needs.”
Douthat said Wells Fargo had previously valued the entire EQT distribution business at $874 million.
Peoples is owned by SteelRiver Infrastructure Partners, an investment management firm that invests in North American infrastructure. As a result of the Equitable transaction, SteelRiver expects to control, through its managed funds and co-investment vehicles, three natural gas regulated utilities operating in contiguous service territories in Pennsylvania, West Virginia and Kentucky, serving about 700,000, mostly residential, customers.
“The acquisition of Equitable attests to our appetite for continued capital deployment in regulated utilities, our ability to work with our portfolio companies to secure unique transactions, away from competitive auction processes, and the desire to continue to attract incremental investor capital and grow our franchise as an owner and operator of core infrastructure assets in North America,” said SteelRiver Senior Managing Partner Dennis Mahoney.
Equitable is expected to be merged into Peoples, with Peoples as the surviving entity. The deal is subject to regulatory approvals from the Pennsylvania Public Utility Commission, West Virginia Public Service Commission and Kentucky Public Service Commission, as well as the Federal Energy Regulatory Commission and federal antitrust authorities. The transaction is expected to close in the second half of 2013.
“The natural gas industry is quickly evolving into the cleanest and most economical solution for meeting this country’s future energy needs,” O’Brien said, “and western Pennsylvania is at the heart of this economic boom.”
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