NextEra Energy Partners, LP to acquire Meade Pipeline Co LLC
NextEra Energy Partners, LP (NYSE: NEP) announced a definitive agreement to acquire Meade Pipeline Co LLC in a transaction valued at approximately $1.37 billion, including roughly $90 million in future capital contributions through 2022, which are related to an expansion opportunity at the existing pipeline.
Meade Pipeline owns a 39.2% interest in the Central Penn Line, a 185-mile intrastate natural gas pipeline that is an integral part of a pipeline system regulated by the Federal Energy Regulatory Commission (FERC) that provides the Marcellus natural gas producing region access to large demand centers in the mid-Atlantic and Southeastern regions of the U.S. The pipeline has the capacity to transport and deliver up to approximately 1.7 billion cubic feet (Bcf) of natural gas per day. The pipeline, which is backed by a minimum 14-year contract with an investment-grade-equivalent customer, is jointly owned by Transcontinental Gas Pipe Line Company, or Transco, which operates the pipeline as a segment of its larger Atlantic Sunrise project.
“We are pleased to have reached a definitive agreement to acquire Meade Pipeline and its interests in the Central Penn Line, which is backed by an attractive fixed-lease payment with a high-credit quality customer, and further expand NextEra Energy Partners’ investment in long-term contracted natural gas pipelines, helping mitigate any potential resource volatility in the portfolio,” said Jim Robo, chairman and chief executive officer of NextEra Energy Partners.
“Meade Pipeline is a very attractive acquisition for NextEra Energy Partners, and is expected to yield a double-digit return to NextEra Energy Partners’ limited partner unitholders and generate a cash available for distribution yield of roughly 14%. This is NextEra Energy Partners’ second third-party acquisition, which helps extend the partnership’s best-in-class long-term growth visibility and further strengthen its investor value proposition. This transaction, combined with the incremental cash available for distribution generated by our previously announced repowering projects and the purchase of the outstanding Genesis debt, is expected to support our long-term growth objectives without the need for additional asset acquisitions until 2021. NextEra Energy Partners remains as well-positioned as ever to deliver on its long-term growth objectives and continue its track record of delivering value to limited partner unitholders.”
Central Penn Line overview
Central Penn Line is a long-term contracted natural gas pipeline that is a critical resource to transport low-cost Marcellus natural gas to Mid-Atlantic demand centers. Transco, which has contracted 100% of the capacity of the pipeline to nine shippers, has a minimum 14-year lease with Meade for its interest in Central Penn. Under the lease, Meade receives a fixed annual payment from Transco and takes no volumetric risk on the pipeline. Meade’s lease revenues are only exposed to the credits of Transco and Cabot Oil & Gas, which has the equivalent of an investment-grade rating and maintains one of the strongest balance sheets and free cash flow profiles in the oil and gas sector.
Cabot has a unilateral option to extend its transportation service agreement with Transco for an additional five years beyond the remaining 14-year term. If Cabot exercises its extension, Transco’s lease with Meade will automatically run through October 2038, five years beyond the current minimum term.
Included in the transaction is an approximately $90 million future expansion opportunity at the existing pipeline. The expansion is expected to add an estimated 0.6 Bcf per day of natural gas capacity to Central Penn through the addition of compression at new and existing stations. Meade will own 40% of the expanded capacity and receive an additional fixed-lease payment from Transco for 20 years from the in-service date. The expansion lease provides a guaranteed pre-tax unlevered return to Meade on capital expenditures for the project. As such, Meade and NextEra Energy Partners are protected from any potential cost overruns. Transco, the operator, filed its FERC application at the end of July. The expansion is anticipated to be completed in mid-2022, subject to receipt of all required regulatory approvals.
The total transaction value is approximately $1.37 billion, which includes an initial consideration of $1.28 billion, subject to working capital and other customary purchase price adjustments, plus future capital contributions of roughly $90 million that are related to the expansion opportunity. The initial purchase price is expected to be primarily financed with approximately $820 million in partially amortizing project finance debt, which includes $760 million related to the operating project and a roughly $60 million draw of the expansion project debt facility. Additionally, NextEra Energy Partners has entered into an agreement for a roughly $170 million convertible equity portfolio financing. The balance of the initial financing will consist of available NextEra Energy Partners’ holding company debt capacity. Funding for the expansion opportunity is expected to be financed with a total of approximately $160 million of project debt, including the $60 million draw that is expected at transaction closing and which is in addition to the roughly $760 million in project debt for the operating project. NextEra Energy Partners has firm commitments in place for all of the project debt, as well as the convertible equity portfolio financing.
Under the terms of the convertible equity portfolio financing, BlackRock Global Energy & Power Infrastructure (BlackRock) will pay roughly $170 million in exchange for an equity interest in the Meade Pipeline. BlackRock is expected to earn an effective coupon of 1% over the initial six-year period, which represents BlackRock’s initial 1% allocation of distributable cash flow from the asset.
NextEra Energy Partners expects to periodically exercise its right to buy out BlackRock’s equity interest for a fixed payment equal to $170 million, plus a levered fixed pre-tax annual return of approximately 11% (inclusive of all prior distributions) in partial interests between the three and a half and six and a half-year anniversaries of the agreement. The partnership has the right to pay 100% of the buyout amount in NextEra Energy Partners’ common units.
Following the initial six-year period, if NextEra Energy Partners has not exercised its entire buyout right, or following year five if certain minimum buyouts have not occurred, BlackRock’s allocation of distributable cash flow from the asset for the portion of the asset it still owns would increase to 99%.
The acquisition is expected to contribute annual run-rate adjusted EBITDA of $90 million to $100 million initially and $105 million to $115 million following completion of the expansion project. Five-year average annual cash available for distribution (CAFD) is expected to be $60 million to $66 million on a run-rate basis, beginning Dec. 31, 2019. As a result of increased debt service following completion of the expansion project, a material step-up in CAFD is not expected at that time.
The acquisition is subject to the expiration or termination of the waiting period under the Hart-Scott-Rodino Act. Pending receipt of required approvals and other customary conditions and approvals, NextEra Energy Partners expects to close the transaction within the next 60 days.
Source / More : NextEra Energy Partners
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