Capital Power has signed an agreement to acquire 100% stake in Arlington Valley, which owns the 580MW Arlington Valley facility, combined cycle natural gas generation facility, in the US.
Arlington Valley will be acquired from funds managed by Oaktree Capital Management, L.P. and its co-investors for a total of US$300 million, subject to working capital and other closing adjustments.
The transaction is expected to close in the fourth quarter of 2018, subject to regulatory approvals and other customary closing conditions.
“The Arlington facility is a key addition to our U.S. growth plans and fully meets all our investment criteria,” said Capital Power’s President and CEO, Brian Vaasjo. “Arlington is a well-positioned asset in the attractive Desert Southwest (DSW) power market with growing demand and a low investment risk environment. In addition to meeting our expected return criteria, the investment contributes to our dividend growth strategy through immediate adjusted funds from operations (AFFO) accretion supported by contracted cash flows to the end of 2025 with a high probability of re-contracting as confirmed through third-party market assessments.”
Capital Power will finance the transaction using its credit facilities followed by permanent debt financing. Given the strength of its balance sheet, Capital Power will not need to access the equity markets to finance the transaction.
Arlington Facility Overview
Nameplate capacity – 580 MW
Location – approximately 50 miles southwest of Phoenix, Arizona
Commercial operation date – June 2002
Equipment – utilizes two GE 7FA combustion turbines, which are well known to Capital Power; two Aalborg (CMI) heat recovery steam generators (HRSG) with duct burners and a single GE D11 steam turbine
Natural gas source – two large natural gas pipelines (El Paso and Transwestern). In the first half of 2018, a new fuel gas interconnection to the Transwestern Gas Pipeline was completed allowing a dual fuel connection where each pipeline can provide 100% of the facility’s fuel requirements.
Interconnection – interconnected at a major substation and power pricing hub (Palo Verde Hub)
Large land ownership provides development opportunities – acquisition includes approximately 3,000 acres of land, the majority of which is suitable for development of additional energy projects.
Arlington Valley sells capacity and electricity to an investment grade load serving utility (credit ratings of A2/A- from Moody’s and S&P, respectively) under tolling agreements through 2025.
The Arlington facility is expected to generate approximately US$62 million of EBITDA and US$44 million of adjusted funds from operations (AFFO) in 2019 during the last year of its current toll. Subsequently, EBITDA averages US$35 million per year (ranging from US$32 million to US$38 million) and US$16 million of AFFO during the 6-year period from 2020 to 2025. Based on the expected financing, the 5-year average accretion for AFFO is expected to be $0.22 per share reflecting a 6% increase. The average accretion to earnings is expected to be $0.03 per share in the first 5 years, representing a 2% increase.
The Arlington facility is adjacent to the Palo Verde hub allowing for additional capacity and energy to be sold into the DSW or the California Independent System Operator (CAISO) wholesale markets during the months outside the summer tolling months. Capital Power intends to pursue additional contracts that would expire in 2025 for the output generated in the non-Summer months. The existing tolling arrangements and expected non-Summer offtake arrangements are expected to generate approximately 60% of the value of the purchase price with the balance of the value to be captured through re-contracting opportunities post-2025.
“In summary, Arlington represents a lower risk, long term cash generating investment which establishes an important platform for potential further growth in the DSW market”, concluded Brian Vaasjo.
Source: Company Press Release