Natural gas transportation and storage provider Equitrans Midstream Corp. announced Thursday that it was undertaking a series of transformative moves valued at $10.45 billion.
The actions include Equitrans acquiring affiliate EQM Midstream Partners, whose market capitalization was recently $4.3 billion, and moving a preferred investment in EQM to Equitrans valued at $1.2 billion.
Equitrans also signed a 15-year gas gathering agreement with natural gas producer EQT in Pennsylvania and West Virginia valued at $4.7 billion and agreed to buy back 25.3 million of its shares from EQT for $250 million.
Latham & Watkins represented Canonsburg, Pa.-based Equitrans with a 25-member team, most of whom are in Houston.
Partners Ryan Maierson and Nick Dhesi led the corporate team along with associates Ryan Lynch, Clayton Heery, Bryan Ryan, Drew Tengler-West, Jessica Sherman and Sarah Dunn.
Partner Jonathan Castelan advised on the gathering agreement with EQT with help from associates Thomas Hillebrand, Sam Bentley and Luke Strother.
Houston partners Catherine Ozdogan and Matthew Jones handled finance matters along with associates Max Fin, Matthew Snodgrass, Jack Traylor, Kate Wang and Rosey Jamail while Houston partner Tim Fenn and associate Jared Grimley worked on tax issues.
Kirkland & Ellis represented EQM Midstream’s preferred investors Magnetar and Capital and GSO Capital Partners, including partner John Pitts and David Thompson and associates Will Mabry, Paul Knowlton, Hannah Marshall and Efren Lemus; capital markets partner Julian Seiguer and associate Mark Kam; debt finance partner Will Bos and associate Mitch McClellan; oil and gas partner Chris Heasley; and tax partners David Wheat, Mark Dundon and Bill Dong and associate Victoria Chang.
Kirkland also counseled EQT on the gas gathering agreement and the buyback of 25.3 million of EQT’s shares held in Equitrans, including partner Chad Smith and associates Isaac Bate and Matt Gibson; capital markets partners Matt Pacey and Lanchi Huynh and associate Brooke Milbauer; and tax associate Joe Tobias (along with two tax partners in the firm’s New York office). Richards, Layton & Finger was the legal advisor to EQM’s conflicts committee.
Citi and Guggenheim Securities were Equitrans’ financial advisors while Evercore assisted EQM’s conflicts committee. Gibson Dunn & Crutcher partner Gerry Spedale represented Guggenheim.
Equitrans’ purchase of EQM Midstream is part of a continuing trend of companies and sponsors simplifying or eliminating their master limited partnerships to cut costs and create more stockholder transparency.
TPH analysts said in a note that they were glad to see EQT’s moves, as a lower cost structure should reduce debt “and increase the viability of the business in a low price environment.” They said they will be looking for EQT management’s thoughts on the A&D, or acquisition and divestiture, market as the company works to achieve $1.5 billion in asset sales plus free cash flow by mid-year.
EQT said in its release that it continues to pursue multiple asset monetization opportunities in conjunction with its previously-announced deleveraging plan and that the potential value of the opportunities is substantially greater than EQT’s stated debt reduction target, despite weakened commodity prices.
“EQT does not believe lower gas prices will impede on its ability to execute multiple transactions,” the company said. “Transaction processes are progressing as planned, market interest is strong and EQT continues to target execution by mid-year 2020.”
Equitrans chairman and CEO Thomas F. Karam said in the release that E-Train, as the company is known, is taking actions designed to rapidly and materially strengthen its balance sheet, including a “blend, broaden and extend” contract with EQT that will strengthen its partnership and position both companies for success over the long-term.
“In addition, we are simplifying our structure to a single C-Corp as well as acquiring 25.3 million shares of ETRN [Equitrans] from EQT,” he said. “As a single C-Corp entity, E-Train will have transparent corporate governance, a larger investor base and will strive to be among the leading ESG companies in the midstream sector.”
Equitrans president and COO Diana Charletta added that the new gathering agreement with EQT replaces over a dozen separate gathering agreements and serves to strengthen its ongoing partnership, which will benefit both companies.
“By simplifying our relationship, EQT can effectively execute their combo-development strategy, which in turn will lead to improved ETRN capital efficiency through better planning and optimized system designs,” she said. “Equitrans’ world-class operations, coupled with our remarkably stable cash flows, simple structure and transparent path forward supports our ongoing commitment to deliver shareholder value.”
Pittsburgh-based EQT said in its release that the transactions with Equitrans – which involve an exchange of 50% of its Equitrans stake for $52 million in cash and incremental fee relief – are expected to save $535 million in fees from 2021 through 2023 and that it’s expecting gathering fees from 2024 through 2035 to drop by 35% compared with expected levels this year.
“Since July, we have been preparing to tactically enhance EQT’s financial footing and operational execution,” EQT CEO and president Toby Rice said. “We’ve repositioned our hedge book to protect the 2020 commodity price slide, refinanced our near-term maturities to create financial flexibility and are realizing the tangible benefits of our operational transformation. These decisive strategic actions have positioned us to successfully navigate this challenging commodity price environment.”
Rice said the gas gathering agreement with EQM significantly improves EQT’s EBITDA and leverage outlook for 2021 and beyond, enabling it to optimize the development of its long-lived core Marcellus asset in the most capital-efficient manner to drive value accretion for EQT and its stakeholders.
“This agreement is just one of many strategic steps we are taking to create a long-term, durable and sustainable business model,” he said.
EQT also signed a letter agreement to award a minimum of $60 million of water services to EQM for five years starting with the Mountain Valley Pipeline’s in-service date. EQT said it and EQM expect to finalize the terms of a water services agreement in the coming months.
Equitrans said it expects to pay a quarterly dividend of 15 cents per share beginning this quarter and EQM expects to pay a quarterly distribution of 38.5 cents per unit for all quarters before the merger’s closing.
The company said the new policy is designed to achieve a pro forma leverage ratio of 4 times and positive retained free cash flow by the end of 2021 that would deliver a strong balance sheet to create the opportunity to return value to shareholders, including through share repurchase programs and dividend increases.
Equitrans said it intends to retire its existing $600 million Term Loan B and that EQM would purchase $600 million of outstanding EQM Series A convertible preferred units in connection with the closing of the acquisition of EQM common units.
The retirement and repurchase are expected to be financed through debt transactions including borrowings under EQM’s $3 billion revolver, which had $2.4 billion of available liquidity as of Dec. 31. In connection with the closing of the acquisition of EQM’s common units, the remaining $600 million of outstanding EQM Series A convertible preferred units will be exchanged for $600 million of newly issued Equitrans Series A convertible preferred shares.
The terms of the new $600 million Equitrans Series A convertible preferred shares include quarterly cash distributions based on a 9.75% annual coupon through March 31, 2024 and a floating coupon rate after that. Equitrans’ Series A convertible preferred shares will be exchangeable on a one-for-one basis for Equitrans common shares beginning in April 2021 and priced at $19.99 per share.