USA Compression Partners LP (NYSE: USAC) said Jan. 16 it will acquire the compression business of Energy Transfer Partners LP (NYSE: ETP), adding 1.6 million horsepower (hp) of natural gas compression in active basins including the Eagle Ford Shale, Gulf Coast, Rockies and Permian Basin.
The transaction, valued at about $1.8 billion, provides the contribution of Energy Transfer Partners’ subsidiaries CDM Resource Management LLC and CDM Environmental & Technical Services LLC to USA Compression Partners and cancellation of USA Compression’s incentive distribution rights and additionally the conversion of its general partner interest into a non-economic general partner interest.
Also part of the transaction, Energy Transfer Equity LP (NYSE: ETE) will acquire the ownership interests in the general partner of USA Compression Partners and roughly 12.5 million USAC common units.
With more than 70% of hp greater than 1,000 hp and an average unit size of about 700 hp, the CDM fleet has an average age of roughly seven years and a current operating utilization rate of 87%. The acquisition of CDM will essentially double Austin, Texas-based USA Compression’s fleet to 3.4 million hp and enhance its focus on large hp installations. The acquisition will also further expand the company’s geographic presence into regions where it’s currently underrepresented and will result in the company having broad coverage across U.S. regions, according to a company press release.
As part of its overall service offerings, CDM also provides a full range of gas treating and emissions testing services, which USA Compression said will complement its growing station services offerings. For 2018, CDM’s EBITDA is estimated to be in the range of $160 million to $170 million, not including the benefit of synergies, which are expected to be at least $20 million on a run-rate basis, the release said.
Eric Long, president and CEO of USA Compression, said in a statement, “This is an exciting day for USA Compression to be able to announce this strategic transaction with Energy Transfer. USAC’s acquisition of CDM is a logical combination of two leading compression service providers—each with nearly two decades of delivering exemplary levels of customer service. Operating in different areas of geographic focus with nominal overlap, CDM brings to USAC a complementary and standardized fleet of large horsepower, infrastructure-oriented equipment, a customer-focused operating philosophy and a strong employee base consistent with those of USAC’s. CDM has been very successful building its compression and treating business; we are excited about the possibilities that the combined partnership will continue to grow and deliver on the exceptional customer service on which our customers depend.”
"In addition to bringing on the compression and treating assets, we look forward to welcoming talented and skilled CDM employees, who have built the company into a strong market participant, into the USAC organization. This transaction gives USAC the geographic reach to compete in all the active producing regions,” he added.
For Energy Transfer Partners, the transaction is expected to strengthen the Dallas-based company’s balance sheet by allowing it to use the roughly $1.225 billion in cash proceeds from the transactions to reduce leverage.
USA Compression said it obtained committed financing for the $1.225 billion cash consideration payable to Energy Transfer Partners through a $500 million perpetual preferred units offering to investment funds managed or sub-advised by EIG Global Energy Partners and other investment vehicles unaffiliated with EIG, as well as $725 million in committed debt financing from JPMorgan and Barclays. The preferred units will pay a 9.75% dividend and are redeemable after 10 years.
The acquisition is expected to be accretive to USA Compression’s distributable cash flow in 2018, the release said. In addition, Energy Transfer Partner’s receipt of a special class of common equity that will not pay distributions for the first year will provide for increased USAC LP coverage, which is expected to be in excess of 1x in 2018 and increase over time. In addition, USAC’s leverage is expected to decrease to mid-4x by the end of 2018.
The transactions are expected to close during first-half 2018, subject to customary closing conditions, including approval pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
Evercore was USA Compression Holdings LLC’s financial adviser. Jefferies LLC was financial adviser to USA Compression’s conflicts committee. Locke Lord LLP provided legal counsel to USA Compression Holdings and Vinson & Elkins LLP was USA Compression Partners’ legal counsel. Richards Layton & Finger provided legal counsel to USA Compression Partners’ conflicts committee. Barclays was financial adviser to Energy Transfer Equity and Energy Transfer Partners. Tudor, Pickering, Holt & Co. was financial adviser to Energy Transfer Partners’ conflicts committee. Latham & Watkins LLP was legal counsel to Energy Transfer Equity and Energy Transfer Partners. Potter Anderson & Corroon LLP provided legal counsel to Energy Transfer Partners’ conflicts committee.
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