$720M sale of Equitable Gas to Peoples Gas to form state's largest gas utility
By Jeremy Boren
Published: Thursday, Dec. 20, 2012, 8:36 a.m.
Peoples Natural Gas Co. is poised to become the largest natural gas utility in Pennsylvania if regulators approve a $720 million deal announced on Thursday to acquire Equitable Gas Co. from Downtown-based EQT Corp.
The transaction would combine two of the Pittsburgh area's three gas utility distributors and allow North Shore-based Peoples to reach more than 660,000 customers in 19 Pennsylvania counties, West Virginia and Kentucky. That would top Reading-based UGI Corp.'s state-leading customer base of 578,250.
It also would pump more Marcellus shale-produced gas into Pennsylvanians' homes. As part of the deal, EQT would pipe 35 billion cubic feet of Marcellus shale gas a year to Peoples customers, many of whom live in homes atop the formation that spans the state.
EQT CEO David Porges said the sale would allow his company to invest in its rapidly growing natural gas drilling, pipeline and compressor station interests, particularly in the Marcellus shale gas play, and permit Peoples to concentrate on its core business of local gas distribution to residential, commercial and industrial customers.
“There will be some additional leasing activities for us, but the reality is we have a lot of land under lease already, so for us a lot of it really is developing the opportunities that we have. We have opportunities that are figuratively sitting on a shelf,” Porges said.
Porges said EQT spent hundreds of millions more than it makes on natural gas production, meaning the company needed to seek ways to pay for its expansion. In 2011, EQT spent $686 million developing Marcellus shale wells, up from $436 million in 2010.
“We've been ticking through ways to raise money to fund our growth,” Porges said, noting EQT sold a pipeline, processing plant and a stake in a natural gas pipeline subsidiary since he became CEO three years ago.
The state Public Utility Commission, Federal Trade Commission and regulators in West Virginia and Kentucky must review the transaction.
The PUC's five-member board could vote to accept, reject or modify it, said spokeswoman Jennifer Kocher.
Customers, business advocates and consumer protection groups will be able to tell the PUC any concerns.
“In all large mergers of this type, our office will be interested in examining the transaction to be sure that it meets Pennsylvania law and that it's going to bring benefits to ratepayers and the commonwealth,” said Tanya McCloskey, Pennsylvania's acting consumer advocate. “It's way too early to have a feel for any concerns about the transaction.”
Executives at both companies hope to close the deal by the second half of 2013. They signed the agreement on Wednesday night. Porges said he called the governors of Pennsylvania and West Virginia after Wall Street trading closed for the day to inform them of the deal.
Morgan O'Brien, CEO of Peoples Natural Gas, said he doesn't anticipate layoffs from the acquisition. The 365 employees of Equitable's gas distribution subsidiary would join Peoples' 980-employee workforce.
O'Brien said the deal would reduce costs by eliminating duplicative services and ultimately lower customers' rates.
“Nowhere else in the country do you have two utilities who serve the same neighborhoods,” O'Brien said. “We can operate in Western Pennsylvania at a lower cost than if we keep these two companies separate.”
For example, Peoples said it could save money by avoiding pipeline replacement costs where the companies' systems overlap.
The transaction is good timing for Peoples, O'Brien said, because the company expects 70 to 100 unionized employees to retire next year. Equitable employees would help replace them.
O'Brien said this deal differs from a failed attempt in 2009 by Equitable Resources Inc. to buy Dominion Peoples Gas. The Federal Trade Commission raised anti-competition concerns about that deal because it would have limited the buying options for hotel, office building and other business owners that use large amounts of natural gas. Some local gas brokers and suppliers opposed the deal.
O'Brien said this deal separates the two companies' utilities from the other parts of the natural gas business chain: production at the wellhead and transportation through pipelines, known as the midstream business. Peoples doesn't drill for natural gas as EQT does. O'Brien said it will entice more marketers and producers to offer gas to Peoples customers.
“We believe this is actually a pro-competition move,” he said. In addition to Peoples and EQT, Columbia Gas of Pennsylvania serves the Pittsburgh area.
Peoples Natural Gas is owned by investment fund SteelRiver Infrastructure Fund North America LP of San Francisco, which acquired it from Dominion Resources Inc. in 2010. Last year, SteelRiver acquired another Western Pennsylvania natural gas utility, T.W. Phillips Gas and Oil Co. of Butler, which now operates as a unit of Peoples Gas.
Brian Youngberg, an energy and utility analyst with Edward Jones in St. Louis, said the transaction would shore up EQT's financial position for 2013 and 2014. Wall Street responded positively to news of the deal with EQT stock price increasing 3.79 percent to $59.17 a share.
“(EQT) is spending a significant amount of money on an annual basis to drill and the operating cash flow does not cover that,” Youngberg said. “The utility was really the only big asset deal they could do.”
Youngberg said he expects the transaction to be approved, but if it isn't, EQT would weigh options — including searching for another buyer or issuing more debt to cover the cost of its growth. If approved, EQT's credit rating could be negatively affected because rating agencies value the consistent, reliable cash flow that a utility provider receives from its customers.
“We're seeing a good-quality utility buying another good-quality utility in the area. It should be a win-win,” Youngberg said.
EQT will reduce its annual dividend, effective in January, a minor factor because most investors don't buy EQT's stock for its dividend, Youngberg said.
The new dividend rate of 12 cents a share, down from 88 cents a share, reflects the blend of EQT's two remaining core businesses — its gas midstream business and its rapidly growing gas production business.
As part of the transaction, EQT will receive about 200 miles of gas transmission pipelines and four storage pools that have a total of 15.1 billion cubic feet of gas capacity. The pipelines and storage pools are in Pennsylvania and connect to EQT's existing transmission pipelines, which will increase its transportation and storage capabilities.
Jeremy Boren is a staff writer for Trib Total Media. He can be reached at 412-320-7935 or email@example.com.
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