EQT Midstream Partners, LP (NYSE: EQM) and EQT Corporation (NYSE: EQT) today announced that EQT Midstream Partners has agreed to acquire EQT Corporation’s (EQT) wholly owned subsidiary, Sunrise Pipeline, LLC (Sunrise), for $507.5 million cash and $32.5 million of common and general partners units. EQT Midstream Partners (Partnership) also agreed to pay additional consideration of $110 million to EQT upon the effectiveness of a new transportation agreement with a third-party that the Partnership expects to become effective post-closing. In addition, the Partnership announced a $0.40 cash distribution per unit for the second quarter 2013, which represents a $0.03 or 8% increase over the first quarter 2013 cash distribution per unit. Sunrise AcquisitionThe primary assets of Sunrise consist of: (i) 41.5 miles of 24-inch diameter FERC-regulated pipeline that parallels and interconnects with the segment of the Partnership’s transmission and storage system from Wetzel County, West Virginia to Greene County, Pennsylvania; (ii) the Jefferson compressor station in Greene County; and (iii) an interconnect with the Texas Eastern pipeline in Greene County. The Sunrise pipeline has existing throughput capacity of approximately 400 BBtu per day, all of which is subscribed under firm transmission contracts with a weighted-average remaining contract life based on contracted revenues of approximately 10 years as of June 30, 2013. EQT Energy, LLC (EQT Energy), 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 September 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. Management expects the Sunrise acquisition to be immediately accretive to the Partnership’s distributable cash flow per unit. The Partnership valued Sunrise based on the present value of expected future cash flows, which are expected to ramp up significantly in 2014 and 2015 based on the growth provided by the Jefferson compressor station expansion and related contracts. 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.
The terms of the acquisition were approved by the Partnership's Conflicts Committee, which is comprised entirely of independent directors. The committee was advised by Evercore Partners Inc. regarding financial matters; and Richards, Layton & Finger P.A. regarding legal matters. The general partner and its affiliates were advised by Baker Botts L.L.P. regarding legal matters.EQT Midstream Partners Quarterly Cash DistributionToday, the Partnership announced a quarterly cash distribution of $0.40 per unit for the second quarter of 2013. The distribution represents a $0.03 or 8% increase over the first quarter cash distribution per unit. The second quarter distribution will be paid on August 14, 2013 to all unitholders of record at the close of business on August 5, 2013. In addition, the Partnership announced estimated second quarter 2013 adjusted EBITDA of $23.4 million, which includes $0.5 million of expenses related to the Sunrise transaction. The estimated second quarter 2013 adjusted EBITDA results are in line with the previously issued guidance of adjusted EBITDA between $22 and $24 million. Non-GAAP DisclosuresAs used herein, the Partnership defines adjusted EBITDA as net income (loss) plus net interest expense, income tax expense (if applicable), depreciation and amortization expense, non-cash long-term compensation expense, and other non-cash adjustments (if applicable) less other income and the Sunrise Pipeline lease payment. Adjusted EBITDA is a non-GAAP supplemental financial measure that management and external users of the Partnership’s financial statements, such as industry analysts, investors, lenders, and rating agencies, use to assess:
- performance versus prior periods;
- the Partnership’s operating performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or financing methods;
- the ability of the Partnership’s assets to generate sufficient cash flow to make distributions to the Partnership’s unitholders;
- the Partnership’s ability to incur and service debt and fund capital expenditures; and
- the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
The table below reconciles estimated adjusted EBITDA with estimated net income as derived from the Partnership’s estimated results for the quarter ended June 30, 2013.
|Three Months Ended|
|June 30, 2013|
|(in thousands $)|
|Reconciliation of Estimated Adjusted EBITDA to Estimated Net Income|
|Estimated net income||$||17,890|
|Estimated interest expense, net||6,485|
|Estimated depreciation and amortization||7,858|
|Estimated non-cash long-term compensation expense||209|
|Estimated non-cash reserve adjustment||(430||)|
|Estimated sunrise lease payment||(8,338||)|
|Estimated other income||(229||)|
|Estimated Adjusted EBITDA||$||23,445|