Equitrans Midstream Plans To Simplify Structure, Eliminate IDRs

Equitrans Midstream Corp. (NYSE: ETRN), which recently formed from a spinoff of Appalachia shale producer EQT Corp.’s (NYSE: EQT) midstream assets, launched plans on Nov. 30 to simplify its corporate structure as part of a three-step process.

The Equitrans simplification transactions, which follow a recent wave of MLP consolidation, are expected to eliminate the company’s incentive distribution rights (IDRs), said Thomas F. Karam, CEO of Pittsburgh-based Equitrans and its affiliated companies.

As part of the three-step process, Equitrans—the majority holder of EQM Midstream Partners LP’s general partner EQGP Holdings LP (NYSE: EQGP)—agreed to acquire interests in EQGP for $20 per unit in cash.

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As a result, Equitrans will boost its stake in EQGP to more than 95% and, as part of its next step, plans to exercise an option to acquire the remaining public units of EQGP.

Lastly, the company proposed to EQM to purchase the IDR and 1.2% GP economic interest in lieu of 95 million common LP units and a non-economic GP interest.

“Today’s announcement demonstrates our commitment to addressing the IDR overhang in a timely manner and executing transactions that provide significant benefits for all stakeholders,” Karam, said in a statement. “Executing on these transactions clears the way for a stable EQM, with 6% to 8% annual distribution growth; and is a strong, strategic starting point for [Equitrans] to grow the annual dividend over the long-term by 8% to 10%.”

Equitrans emerged as a standalone public company with a premier asset footprint in the Marcellus and Utica shale region following the completion of its separation from EQT on Nov. 13. EQT had launched the spinoff of its midstream business earlier this year amid investor pressure claiming a separation would ensure better shareholder returns.

Stacey Morris, director of research at Alerian, said it’s no secret that MLP equity markets have been challenged since oil prices cratered in 2014, and the recent volatility in oil prices and the broader market haven’t helped.

“Dropdown MLPs promising 20+% distribution growth were once the darlings of the MLP space, as investors were willing to stomach equity issuances to see their distributions increase,” Morris said. “Weak capital markets have made issuing equity difficult, and investors have a lower tolerance for equity issuance, particularly as the space shifts more toward self-funding.”

Further, given their progressive nature, she noted that IDRs can become more of a burden over time as the distribution grows.

“Beyond allowing a parent to monetize assets, dropdowns facilitate distribution growth, which enhances the value of the parent’s [IDRs],” Morris said. “If dropdowns aren’t working, parents can’t realize value from their MLPs.”

Equitrans private purchases are expected to close by about Dec. 31. The limited call right to acquire the remaining EQGP common units will close in January.

Equitrans intends to use the cash proceeds from a newly issued Term Loan B to finance the private purchases and the purchases pursuant to the limited call right. The company said it has secured committed financing in support of these purchases, according to its press release.

Upon completion of the private purchases, the limited call right, and the proposed IDR transaction, Equitrans will have accomplished a full simplification of EQGP and EQM, resulting in a projected 61% ownership of EQM. Additionally, EQM will be the only publicly traded partnership under Equitrans and is expected to benefit from the elimination of the IDR burden, as well as stronger coverage and balance sheet metrics.

Guggenheim Securities LLC and Goldman Sachs & Co. LLC are financial advisers to Equitrans. Both advisers also provided committed financing in support of the private purchases and the exercise of the limited call right. Baker Botts LLP provided legal counsel to Equitrans.