Good morning, and welcome to the NextEra Energy Partners Conference Call. All participants will be in listen only mode. After today's presentation, Please note this event is being recorded. I would now like to turn the conference over to Matthew Roskott, Director, Investor Relations. Please go ahead.
Good morning, and welcome to this Nexstar Energy Partners conference call. As a reminder, today's call is being recorded and a copy of the slide presentation is available on the Investor Relations section of nextareenergypartners.com. An audio archive of this call will be available shortly after the call has concluded. With me this morning are Jim Robo, Chairman and Chief Executive Officer of NextEra Energy Partners Rebecca Kiaba, Chief Financial Officer of NextEra Energy Partners John Ketchum, President of NextEra Energy Partners and Mark Hixson, Executive Vice President of NextEra Energy Partners. Jim will begin with prepared remarks and we will then open the call for questions.
We will be making forward looking statements during this call based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward looking statements if any of our key assumptions are incorrect or because of other factors discussed in today's news release, in the comments made during this conference call, in the Risk Factors section of the accompanying presentation or in our latest reports and filings with the Securities and Exchange Commission, each of which can be found on our website, nexteraenergypartners.com. We do not undertake any duty to update any forward looking statements. Today's presentation also includes references to non GAAP financial measures. You should refer to the information contained in the slides accompanying today's presentation for definitional information.
With that, I will turn the call over to Jim.
Thanks, Matt, and good morning, everyone. As you know, earlier this morning, NextEra Energy Partners announced an agreement to acquire Mead Pipeline Company, which owns an approximately 40% interest in Central Penn Line, an intrastate natural gas pipeline in Pennsylvania that is an integral part of a pipeline system regulated by FERC that provides the Marcellus producing region access to large demand centers in the Mid Atlantic and Southeastern regions of the United States. Backed by a minimum 14 year contract with investment grade equivalent customer and no volumetric risk, this acquisition is consistent with NextEra Energy Partners' focus on investing in long term contracted clean energy assets with strong creditworthy counterparties. The transaction represents the 2nd third party acquisition for NextEra Energy Partners and further expands its presence in the long term contracted natural gas pipeline space. The total transaction value is approximately $1,370,000,000 including roughly $90,000,000 in future capital contributions through 2022, which are related to an expansion opportunity at the existing pipeline.
The initial investment is expected to be financed with approximately $820,000,000 of partially amortizing financed debt and a roughly $170,000,000 convertible equity portfolio financing, the terms of which I will describe in more detail in a moment, as well as existing NextEra Energy Partners debt capacity. Funding for the expansion project is expected to be financed with approximately $160,000,000 of project debt, with roughly $60,000,000 of that amount drawn at transaction closing and included in the $820,000,000 that I just referenced. NextEra Energy Partners has firm commitments in place for all of the project debt, as well as the convertible equity portfolio financing. The acquisition is expected to contribute annual run rate adjusted EBITDA of $90,000,000 to $100,000,000 initially and $105,000,000 to 115,000,000 dollars following completion of the expansion project. 5 year average annual cash available for distribution is expected to be $60,000,000 to $66,000,000 on a run rate basis beginning December 31, 2019.
As a result of increased debt service following completion of the expansion project, a material step up in cash available for distribution is not expected at that time. We believe that Mead pipeline is a very attractive acquisition. We expect the acquisition to yield a double digit return to NextEra Energy Partners LP unit holders and generate a CAFD yield of roughly 14%. Additionally, executing on a 3rd party acquisition helps extend NextEra Energy Partners' already best in class long term growth further strengthening NextEra Energy Partners' investor value proposition. Let me now spend a brief moment providing additional detail on the acquisition.
Mead Pipeline owns a 39.2 percent interest in the Central Penn line. Central Penn is a 185 mile intrastate natural gas pipeline originating in Susquehanna County, Pennsylvania and extending to Lancaster County, Pennsylvania with the capacity to transport and deliver up to approximately 1.7 Bcf of natural gas per day. Central Penn entered in service in 2018 and is jointly owned by Transcontinental Gas Pipeline Company or Transco, who operates the pipeline as a segment of its larger Atlantic Sunrise project. Similar to the Texas pipelines, Central Penn is a long term contracted natural gas pipeline serving attractive and growing regions. The pipeline is a critical resource in a FERC regulated pipeline system that transports low cost Marcellus natural gas to mid Atlantic demand centers.
Transco, which has contracted 100 percent of the capacity of the pipeline to 9 shippers, has a minimum 14 year lease with Mead for its interest in Central Penn. Under the lease, Mead receives a fixed annual payment from Transco and takes no volumetric risk on the pipeline. Mead's lease revenues are only exposed to the credits of Transco and Cabot Oil and Gas, which has the equivalent of investment grade rating with 1 of the strongest balance sheets and free cash flow profiles in the oil and gas sector. We believe Cabot is among the best position of the gas producers in the Northeast and that this pipeline is and will continue to be an important outline an important outlet for its gas production to key markets. Cabot has a unilateral option to extend its transportation service agreement with Transco for an additional 5 years beyond the remaining 14 year term.
If Cabot exercises extension, Transco's lease with Mead will automatically run through October 2,038, 5 years beyond the current minimum term. Longer term, we believe there will continue to be demand for Central Penn's capacity, particularly given the challenges of developing new natural gas pipelines in this region of the country. As I mentioned earlier, the transaction includes an expansion investment that 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. Mead 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 Mead on capital expenditures for the project.
As such, Mead and NextEra Energy Partners are protected from any potential cost overruns. Transco, the operator, filed its FERC application at the end of July, and Pennsylvania has generally been a supportive for natural gas pipeline development. The expansion is anticipated to be completed in mid-twenty 22, assuming all necessary regulatory approvals are received in a timely manner. As I mentioned earlier, the total transaction value is approximately $1,370,000,000 This amount includes an initial consideration of $1,280,000,000 subject to working capital and other customary purchase price adjustments, plus future capital contributions of roughly $90,000,000 that are related to an expansion opportunity. The initial purchase price is expected to be primarily financed with approximately $820,000,000 in partially amortizing project finance debt, which includes $760,000,000 related to the operating project and a roughly $60,000,000 draw of the expansion project debt facility.
Additionally, NextEra Energy Partners has entered into an agreement for a roughly $170,000,000 convertible equity portfolio financing. This convertible equity portfolio financing is structured similarly to NextEra Energy Partners' 2 prior transactions in terms of cash allocation and buyout option timing, wherein the investor will earn a coupon of approximately 1%, NextEra Energy Partners has the right to buy them out periodically between the 3.5-6.5 year anniversaries of the transaction. Where the structure differs from prior transactions is the amount paid to the investor for exercising NextEra Energy Partners' buyout right will be calculated on a levered return basis and the consideration can be paid up to 100 percent in NextEra Energy Partners' common units issued at no discount to the then current market price versus 70% in the prior financings. These changes are due to the investors' interests being subordinated to the project debt, whereas in the previous two transactions, NextEra Energy Partners paid an unlevered return and the investor utilized project back leverage to earn their levered return objective. For this transaction, the buyout can be completed through payments equal to the equity contribution plus a fixed pre tax annual levered return of approximately 11%, inclusive of all prior distributions, which is consistent with the investors' levered returns expectations in our prior transactions.
The combination of this financing alongside the project debt is expected to provide a lower cost of capital to NextEra Energy Partners than the prior convertible equity portfolio financings. In addition, the ability to fund the buyout with 100 percent common units is expected to be more accretive to NextEra Energy Partners' unitholders, who retain all of the unit price upside as NextEra Energy Partners executes on its expected distribution growth objectives. We are pleased to execute another convertible portfolio equity financing at favorable terms, demonstrating NextEra Energy Partners' continued ability to access attractive sources of capital to finance its growth. By leveraging the significant private capital that is targeted to be deployed in clean energy infrastructure, these transactions help fund NextEra Energy Partners' long term growth, while flexibly laying in common equity over time. With low initial effective coupons, these financings support more cash to be available to LP unitholders, allowing NextEra Energy Partners to acquire fewer assets to achieve the same level of future distribution growth.
The balance of the initial financing will consist of available NextEra Energy Partners holding company debt capacity. Funding for the expansion project is expected to be financed with a total of approximately $160,000,000 of project debt, including the $60,000,000 draw that is expected at transaction closing, and which is in addition to the roughly $760,000,000 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 and expects to close the transaction within the next 60 days subject to the receipt of the required regulatory approvals. Let me now turn to NextEra Energy Partners cash available for distribution expectations. Earlier this month, NextEra Energy Partners launched a tender that by the end of this year, we will have acquired all of the remaining Genesis debt, resulting in an increase in cash available for distribution through the removal of project level debt service.
This benefit combined with the incremental CAFD generated by our previously announced repowering projects and the purchase of the outstanding Genesis Holding Company notes, as well as completion of the Mead acquisition, increases our expectations for year end 2019 run rate CAFD including full contributions from PG and E related projects to a range of $560,000,000 to $640,000,000 dollars reflecting calendar year 2020 expectations for the forecasted portfolio at the end of 2019. To put this range in perspective, this midpoint reflects approximately 60% growth from the comparable year end 2018 run rate midpoint. We remain confident that our existing contracts with PG and E will ultimately be upheld in PG and E's bankruptcy process. However, while we expect to gain access to the cash distributions that were previously restricted at our Genesis project through the purchase of the outstanding debt, cash distributions from our Desert Sunlight 250 and 300 projects continue to be restricted during the bankruptcy proceedings. Excluding all contributions from the Desert Sunlight Projects, NextEra Energy Partners expects a year end 2019 run rate for CAFD in the range of $505,000,000 to $585,000,000 Additional details are shown in the accompanying slide.
In addition to the updated year end 2019 cash available for distribution run rate
rate
expectations, which assume full contributions from projects related to PG and E as revenue, is expected to continue to be recognized, increases to $1,225,000,000 to $1,400,000,000 Today, we are also introducing December 31, 2020 run rate expectations that are the same as year end 2019 run rate expectations that I just announced. Approximately 60% growth between the midpoint of the new cash available for distribution range and the comparable year end 2018 run rate midpoint or a 2 year comparable annual growth rate of more than 25% supports our long term distribution growth expectations without the need for additional asset acquisitions until 2021. As a reminder, all of our expectations are subject to our normal From a base of NextEra Energy Partners 4th quarter 2018 distribution per common unit at an annualized rate of $1.86 per common unit, we continue to see 12% to 15% per year growth in LP distributions as being a reasonable range of expectations through at least 2024, subject to our usual caveats. For 2020, we expect to achieve these distribution growth objectives, while maintaining a payout ratio in the mid-seventy percent range, assuming NextEra Energy Partners receives cash distributions from our Desert Sunlight projects. Additionally, as a result of NextEra Energy Partners' significant financing flexibility, aside from any modest issuances under the at the market program or issuances related to the conversion of NextEra Energy Partners convertible securities, we continue to expect that NextEra Energy Partners will not need to sell common equity until 2021 at the earliest.
Today's transaction demonstrates NextEra Energy Partners' continued ability to execute on accretive acquisitions of long term contracted clean energy assets with strong creditworthy customers and attractive cash flows. With today's announcement, NextEra Energy Partners has recently demonstrated its ability to execute on all three of its growth avenues: organic growth, acquisitions from third parties and acquisitions from NextEra Energy Resources. When combined with NextEra Energy Partners' ability to access extremely low cost financing to support its growth, NextEra Energy Partners remains as well positioned as ever to deliver on its long term expectations. In summary, I'm very excited about today's acquisition and continuing NextEra Energy Partners' track record of delivering value to LP unitholders. With that, we will be happy to answer any questions.
The first question comes from Steve Fleishman of Wolfe Research. Please go ahead.
Yes, hi. Excuse me, good morning. Good morning, Steve. Hey, Jim. So a couple of questions.
First, just on the EBITDA forecast comparable, it doesn't move as much as CAFD, which I assume a big chunk of that is just the California restructuring. But could you maybe just go through why the EBITDA change in forecast is much more modest than CAFD?
Yes. I think, Steve, you captured it's really 2 pieces. One is, we've been more successful with convertible equity portfolio financings than we expected at the beginning of the year. And so those have very low cash needs and so benefit CAFD more than obviously they don't have a benefit to EBITDA. And secondly, as you said, the restructuring of the Genesis debt similarly has no impact on EBITDA, but also benefits CAFD.
Okay. And then I guess just strategic question, a lot of people own NEP partially or some group of investors own it for the renewables exposure. And I'm not sure as much want to see gas pipeline. So could you maybe at least talk to thoughts strategically from a mix standpoint of where you kind of want to keep the runway of businesses?
Sure, sure. I think, listen, when we did the original IPO, now I guess more than 5 years ago, we said the focus was going to be on clean energy assets and I view gas pipelines as clean energy gas is an important bridge fuel to a low or 0 carbon future in 30 years out. And one of the things we like a lot about this acquisition is there's no volumetric risk. It is a fixed it's a fixed payment, has no resource variability. We think that fits in well with the wind and the solar that we have embedded in this portfolio that we mix of very long term contracted gas pipelines.
We're not big believers in taking volumetric risk in midstream assets as you know, and we would from that standpoint would have no interest in putting those kind of assets into NEP. But something with something that is long term contracted like the Texas Pipeline acquisition, which has been a terrific acquisition for NEP and has performed terrifically since we did the deal. And something like Mead, which I'm very excited about, I think that those type of assets combined with the renewables give you a very solid base. 3rd party I think the other thing about this that I like a lot, Steve, is 3rd party acquisitions really extend the growth runway of NEP in a very accretive way, right. And so we're excited that we're able to do this.
It's a terrific time to finance what is a 14% CAFD yield in a historically low interest rate environment and we like it a lot for all of those reasons.
Okay. Thank you.
The next question comes from Julien Dumoulin Smith of Bank of America. Please go ahead.
Hey, good morning, Jim. Maybe just a follow-up Hey, howdy. Hey, howdy. Just a follow-up on Steve's question, if you can. Can you walk through some of the puts and takes in that EBITDA number just to give a little bit more granularity?
Because if I understand it right, you've put in a few different things here, and I'll let you go
before I talk. Sure. I think the other thing that I would say about the EBITDA number, Julian, is that we wanted to give you a view of when we set that a year ago, we did not have any of these refinancings in our plans, right? And so one of the things about net that we've always been very focused on is being flexible and being responsive to what's going on in the market. And so we've had this opportunity to I think at particularly on the HoldCo debt and now with the OpCo debt at Genesis to tender for it, which I think will be very positive for unitholders over the long term.
We think it's going to be NPV positive, even giving a pretty aggressive assumption around when PG exits from bankruptcy and that has a great CAFD benefit and no EBITDA change as does we've been much more successful with the convertible equity portfolio financings that we thought. And so we've needed to put honestly, we've needed to the NEPs needed to acquire fewer assets to hit its CAFD numbers, right? And so it's just much more efficient from a unitholder standpoint, a growth runway and making sure that we have the you want to have the vehicle right sized to have the maximum growth runway you possibly can, right. And so these are all these have been all mechanisms that we've used to really efficiently generate a lot more cash out of the portfolio than we expected to at the beginning of the year when we did the EBITDA guidance. And so we wanted to change it, because obviously this is this deal is adding EBITDA, but we also wanted to then put all of the put the big up in CAFD, which is a huge up, the 60% up in CAFD, I think is a terrific indication of the growth potential for vehicle going forward, but we also wanted to then give we know folks who are having the EBITDA because it helps them model what's going on in the portfolio and we wanted to put that in perspective as well given the success we've had with the refinancings and the equity portfolio financing.
Got it. And that might be a good segue to the just a quick follow-up here. How do you think about dividend growth just when you think about the latest transaction, the run rate articulated for 'nineteen? Just want to clarify that over the longer period here, just the 12% to 15% etcetera?
Yes. I mean, I think you've seen that's not changing. Our expectations remain the same. The 12% to 15% distribution growth through 2024. And obviously our history has been to grow at the high end of that range.
And these deals only further solidify our ability to continue to grow distributions 12% to 15% through for a very long time in this vehicle and it's one of the reasons why I'm really excited about the acquisition because it's so accretive to the growth runway given that it's a 3rd party acquisition.
Great. Thank you.
The next question comes from Chris Kotowski of Oppenheimer. Please go ahead.
Sorry, I think you got the name wrong. It's Colin Rusch. Could you talk a little bit about the technological diversity that you're looking at going forward? If we're looking at clean energy on a broader basis, we're certainly seeing plenty happening on the micro grid side or hydrogen or even other assets. And as you look outside of the NEP or the NextEra portfolio, there's certainly an awful lot to look at.
As you go forward, how should we think about the technology exposure that you guys are willing to take on and the diversity of the mix that you're looking at?
Yes. So it's a great question, Collin. I think one of obviously battery storage is another technology that Energy Resources is spending a lot of time focused on and that we're on the energy resources side, we're signing long term contracts for those kind of projects as well. So I start by what were the and I continue to go back to the IPO and what our vision for this vehicle was when we took it public 5 years ago, which was good credits, long term contracts, clean assets, right, and technologies that we're comfortable with, right? And so all of those I think are the criteria which we would do.
So if we not if there was a new technology a totally brand new technology that's never been project financed before that was clean, that had a long term contract, but wasn't backed up by a warranty from an investment grade OEM, that probably wouldn't fit, right. And so it's got to be they have to fit the set of criteria that we laid out when we and we've been very clear about those criteria over the years, the set of criteria that we laid out when we took the vehicle public and as we've talked about it since then. So new technologies are absolutely potentially on the table and I would hope that in the future that NEP would as the battery storage, for example, continues to be a bigger and bigger piece of energy resources business that there will be battery storage projects that are in that become available to NEP to acquire. And I think that's that would be in terms of the next technology, I think the most likely one that would be part of the NEP portfolio going forward.
Okay, thanks. And then just in terms of mix of NextEra assets versus third party assets, how should we think about your intention for acquisitions? If you're trying to extend the runway on the next year assets and the growth, should we be thinking about something like quarter or a third of the acquisitions coming from outside the partners or the parent entity?
So I wouldn't put a percentage against it. I would. I think you can look at the last 5 years and do the math and it probably is close to a quarter given the I haven't done the math. Honestly, we should go back and do that. But it's in the probably in the 15% to 25% range of what we've been able to do in the vehicle has been 3rd party related and we're always opportunistic on acquisitions, right.
We're not going to plan that we can do 100% third party acquisitions. We're not going to plan that we can do no third party acquisitions. I think we're going to be opportunistic. And an NEP is a very is a has a true currency and has an ability I think finance things in very creative and flexible ways. And so I think we're going to be and it has a terrific tax position.
And so you combine all those three things. And I think we will be quite competitive in 3rd party acquisitions. But again, we're also going to be very disciplined. And this is a you look at this CAFD yield, this is a 14% CAFD yield, which is actually a little better than some of the things that we've been doing on the wind and the solar side in terms of acquisitions from NextEra Energy Resources. So it certainly will be a piece of it, but I wouldn't commit to having it be a certain percentage.
All right. Thanks so much. This concludes the Q and A session and also the conference for Next Era Energy Partners. Thank you for attending today's presentation. You may now disconnect.