Peoples seeks to buy Equitable Gas

EQT would use money from sale to ramp up Marcellus Shale drilling

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Peoples Natural Gas wants to buy Equitable Gas for $720 million in a deal that would make Peoples the region's largest gas utility firm -- gaining some 275,000 Equitable Gas customers -- if the market-shifting deal is approved by state and federal officials.

Under the proposal announced Thursday, Downtown-based EQT Corp. would shed its utility business, using money from the sale to accelerate gas drilling and processing operations in the Marcellus Shale region.

Peoples, in turn, would absorb Equitable's customers, equipment and some 360 workers at a time when the North Shore-based utility faces costly equipment updates and a retiring workforce.

The transaction, which would increase the Peoples customer count to almost 700,000 and allow EQT to focus exclusively on drilling operations, marks the culmination of six months of discussions between two friendly CEOs with a complex trade-off of cash, employees and assets that would rewrite the regional energy market.

All of Equitable Gas customers would become Peoples customers, although nothing will change until the deal is approved. That process could take almost a year.

PG graphic: EQT Corp. sells to pursue drilling
(Click image for larger version)

Experts said a reduction in the number of regional utilities will not necessarily mean higher gas prices for homeowners and businesses, in part because all rate changes would remain subject to state Public Utility Commission approval. The other regional utility, Columbia Gas of Pennsylvania, has about 415,000 customers.

Peoples is currently replacing miles of pipeline in Allegheny County as part of a $200 million upgrade that swaps plastic piping for cast-iron piping. In neighborhoods where Equitable and Peoples both have pipelines, only a single new one would be put in if the two companies become one, Peoples CEO Morgan O'Brien said.

A "handful" of duplicative senior-level positions are expected to be eliminated if the companies combine, Mr. O'Brien said. He doesn't foresee operational positions, many of which are unionized, being affected.

EQT, meanwhile, needs the $720 million to finance increased drilling in the Marcellus Shale. EQT shares closed Thursday at $59.17, up 3.79 percent.

Since CEO David Porges took the top job in 2010, EQT has narrowed its focus to drilling for gas and the "midstream" operations that process and treat the gas. But it's expensive to drill in the Marcellus -- about $6 million per well -- and deep-pocketed competitors such as Chevron and ExxonMobil are drilling in the same play.

With help from asset sales and reserves, EQT has outspent its cash flow by about $300 million for the past several years, Mr. Porges said. The $720 million raised by the sale would go toward developing leased land in Pennsylvania and West Virginia that hasn't seen drilling.

"We have a lot of land under lease," he said. "We have opportunities that are figuratively sitting on a shelf."

Before any money can trade hands, the companies face an approval process that's expected to last through the fourth quarter of 2013.

An administrative law judge at the Pennsylvania PUC will hold a hearing on the deal before it goes to the commissioners, who look at rates, reliability and quality-of-service issues before issuing a ruling.

The deal also is subject to approval by regulatory bodies in West Virginia and Kentucky as well as federal regulators and antitrust authorities.

PUC spokeswoman Jennifer Kocher on Thursday described such mergers as "periodic" in the state. Peoples went through the process in May 2011 when it acquired T.W. Phillips Gas and Oil Co., a Butler County utility now known as Peoples TWP.

The Equitable Gas operation, with about 360 workers and 4,000 miles of pipeline, is based in a North Shore building that can be seen from boardrooms in parent company EQT Corp.'s Downtown headquarters. There are no plans to relocate those workers to the Peoples building, also on the North Shore.

Between 80 and 100 Peoples employees -- or about 10 percent of its current workforce -- are expected to take a retirement package offered at the end of 2013, and Mr. O'Brien said Equitable employees will fill those roles.

Under the deal, EQT also would supply about 35 billion cubic feet of Marcellus gas to Peoples per year, replacing some of the gas the utility has to buy from interstate pipelines during winter months. That's about half the amount of gas produced by EQT in the most recent third quarter.

EQT also would acquire high-pressure gas lines that Peoples currently owns across several counties in southwestern Pennsylvania. The high-pressure lines deliver gas to utilities and other major markets and would be integrated into EQT's existing pipeline highway.

The sale announced Thursday is the fourth and largest move in three years by EQT to raise cash for drilling operations in the Marcellus region.

In June, it raised $262.5 million off an initial public offering of its EQT Midstream Partners LP subsidiary, the branch of the parent company that treats and processes the gas. In July 2011, the company sold its Big Sandy Pipeline in Kentucky to Spectra Energy Partners LP for $390 million. Five months before that, it sold a natural gas processing complex and pipeline in Kentucky to MarkWest Energy Partners LP for $230 million.

By the end of this year, EQT expects to have drilled 132 Marcellus wells during 2012, with 2013 gas production expected to increase about 30 percent, according to preliminary guidance to investors.

Analysts at Wells Fargo Securities praised the move, saying it would offer a "cleaner story for investors" while funding development in the Marcellus. The higher risk associated with exploration led Fitch Ratings to downgrade EQT Corp.'s rating one step.

Energy firms across the country have recently decided to focus exclusively on either the utility or the production business, said Aaron Calder, an analyst at Gelber & Associates in Houston. Utility businesses, with capped profits and set rates, are much different from production companies that answer to market and investor whims.

"If gas is cheap, you have to lower your rates," he said. "It's a safe business, but not really one where you can expect a lot of growth."

The two CEOs began discussing the possibility of a sale six months ago.

The deal was signed Wednesday after the markets closed. The governors of West Virginia and Pennsylvania found out around 8 p.m., and investors about 12 hours later.

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Erich Schwartzel: or 412-263-1455.


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