8-K: Epsilon Energy Secures New 10-Year Gas Gathering Agreement, Replacing Prior Deal

Epsilon Energy USA, Inc. has entered into a new 10-year gas gathering agreement with Appalachia Midstream Services, LLC, effective January 1, 2024, replacing a prior agreement.

Summary

• Epsilon Energy USA, Inc. has finalized a new Anchor Shipper Gas Gathering Agreement (ASGGA) with Appalachia Midstream Services, LLC, effective January 1, 2024, for a primary term of ten years.
• This new agreement replaces a prior agreement and establishes fixed rates for gathering, compression, and cross-flow of natural gas for all shippers on each system.
• The rates will be adjusted annually based on the Consumer Price Index for All Urban Consumers (CPI-U) starting in January 2025.
• Notably, the gathering rates in Auburn GGS, Rome GGS, and Overfield GGS will no longer be subject to annual cost-of-service redetermination.
• The fixed gathering rate for Auburn GGS in 2024 is set at $0.475 per MMBtu.
• Acreage dedications, service priority levels, required shipper approvals, and shipper voting procedures remain substantially similar to the previous agreement.

Sentiment

Score: 7

Explanation: The document is positive as it secures a long-term agreement with fixed rates, but it is not overly enthusiastic as it is a replacement of a previous agreement and contains standard industry terms.

Positives

• The new agreement provides rate certainty with fixed gathering, compression, and cross-flow rates.
• Annual adjustments based on the CPI-U offer a predictable mechanism for rate changes.
• Elimination of annual cost-of-service redetermination for certain systems simplifies the rate structure.
• The agreement maintains similar acreage dedications, service priority levels, and shipper voting procedures as the prior agreement, ensuring continuity.

Risks

• The agreement's reliance on the CPI-U for annual adjustments could lead to increased costs if inflation rises significantly.
• While the agreement provides fixed rates, the actual costs could still fluctuate due to the CPI-U adjustments.
• The agreement's complexity, with various fees and conditions, could lead to potential disputes or misunderstandings.

Future Outlook

The agreement provides a stable framework for gas gathering services for the next ten years, with annual rate adjustments based on the CPI-U.

Industry Context

This agreement reflects the ongoing need for midstream infrastructure to support natural gas production in the Appalachian region. It is common for producers to secure long-term gathering agreements to ensure reliable transportation of their product to market.

Comparison to Industry Standards

• Long-term gas gathering agreements are standard practice in the oil and gas industry, providing producers with predictable transportation costs and midstream companies with stable revenue streams.
• The use of CPI-U for annual rate adjustments is a common mechanism to account for inflation, although some agreements may use other indices or fixed escalators.
• The specific rates and terms of this agreement are likely to be competitive within the Appalachian region, but without access to other specific agreements, a direct comparison is difficult.
• Companies like Williams, Kinder Morgan, and Energy Transfer are major players in the midstream sector and often enter into similar agreements with producers.

Stakeholder Impact

• Shareholders will benefit from the long-term stability and predictability of gas gathering services.
• Employees of both Epsilon Energy and Appalachia Midstream Services will have continued work related to the agreement.
• Customers of Epsilon Energy will have a reliable supply of natural gas due to the gathering agreement.
• Suppliers to both companies will have continued business opportunities.

Key Dates

Keywords

gas gathering agreement, natural gas, midstream services, fixed rates, CPI-U, Appalachia Midstream Services, Epsilon Energy, gathering systems, compression, cross-flow