EQT Drops Down Midstream Assets To EQM
Plans to sell the subsidiary, Sunrise Pipeline LLC.
EQT Corp. (NYSE: EQT) plans to sell one of its natural gas infrastructure subsidiaries, Sunrise Pipeline LLC, to another subsidiary, EQT Midstream Partners LP (NYSE: EQM) for about $540 million in cash and shares.
EQT Midstream plans to pay $507.5 million in cash and $32.5 million of common and general partner units to its parent corporation for Sunrise. The acquired midstream assets include 41.5 miles of 24-inch natural gas pipeline that parallels and interconnects with transmission and storage system in Wetzel County, West Virginia. Also included in the sale are a compressor station in Greene County, West Virginia and an interconnect with the Texas Eastern pipeline in Greene County.
The Sunrise pipeline has throughput capacity of 400 BBtu per day, all of which is subscribed under firm transmission contracts. The weighted average of the remaining contract life is about 10 years as of June 30.
EQT Energy LLC, EQT's marketing affiliate, has entered into a firm contract for 305 BBtu per day of capacity. In addition, 95 BBtu per day of capacity has been contracted with third-parties. These contracts provide $44.3 million in annual firm reservation revenue and up to $0.7 million of annual firm usage revenue, if fully utilized.
Sunrise is currently expanding its Jefferson compressor station, which will provide approximately 550 BBtu per day of additional capacity. The partnership will invest $30 million for the expansion, which is fully subscribed and expected to be in service by Sept. 1, 2014. EQT Energy has entered into a precedent agreement for approximately 295 BBtu per day of firm capacity over a 10-year term, commencing on the date the expansion is placed in service, which results in $26.9 million of annual firm reservation revenue.
Sunrise also entered into a precedent agreement with a third-party, over a 20-year term, for firm transportation capacity related to the Jefferson expansion. The precedent agreement is for approximately 252 BBtu per day of firm transportation capacity from November 1 through March 31 of each year and 62 BBtu per day of firm transportation capacity from April 1 through October 31 of each year.
The agreement is expected to commence April 1, 2014, and result in $13.0 million of annual firm reservation revenue and up to $1.0 million of annual firm usage revenue, if fully utilized. If a transportation agreement becomes effective under the terms of the precedent agreement by December 31, 2014, the Partnership will make a payment of $110 million to EQT as additional consideration.
The partnership currently operates the Sunrise assets as part of its transmission and storage system under a lease agreement with EQT.
The lease is accounted for as a capital lease for GAAP purposes and, as a result, revenues and expenses associated with Sunrise are included in the Partnership's financial statements; however, the monthly lease payment to EQT offsets the impact on the Partnership's distributable cash flow. Effective with the close of the Sunrise transaction, the lease agreement will terminate.
Upon completion of the Jefferson expansion, revenues generated under contracts are expected to be approximately $84 million annually. In addition, if fully utilized, revenues generated by firm usage could add up to $1.7 million annually, based on the terms of the previously described contracts. The Partnership expects ongoing operating expenses for the Sunrise assets, excluding depreciation and amortization, to be approximately $5 - $7 million per year.
EQT Corp. and its midstream subsidiary, EQT Midstream Partners LP, are based in Pittsburgh, Pa.
Wells Fargo Securities said the price for the dropdown appeared in line with similar transactions and added that the company now had means to fund $320 million in midstream capital expenditures. In addition, EQT will receive $110 million from EQM once the sale of Peoples Natural gas Closes, which is expected to occur by yearend.
The transaction is good for the company because it funds the company’s midstream mcapital expenditures for 2013. EQT Corp. and its midstream subsidiary, EQT Midstream Partners LP, are based in Pittsburgh, Pa.