Crestwood has acquired a 50 percent stake in Jackalope Gas Gathering Services LLC from Williams for approximately $485 million. Based in Converse County, Wyoming, the Jackalope assets provide gathering, compression and processing services and include the Jackalope Gas Gathering System and the Bucking Horse Processing Plant. Evercore acted as financial adviser to Crestwood with Vinson & Elkins providing legal counsel.
HOUSTON–(BUSINESS WIRE)–Crestwood Equity Partners LP (NYSE: CEQP) (“Crestwood”) announced today, in a separate joint press release with The Williams Companies, Inc. (NYSE: WMB)(“Williams”), that Crestwood Niobrara LLC (“Crestwood Niobrara”) acquired a 50% interest in Jackalope Gas Gathering Services, L.L.C. (“Jackalope”) from Williams for approximately $485 million. The acquisition of Williams’ interest is a continuation of Crestwood’s strategy to expand its operational footprint in its core growth basins. Consolidating the Jackalope assets positions Crestwood for long-term growth in the prolific Powder River Basin by supporting Chesapeake Energy’s (NYSE: CHK) and other producer customers’ long-term development plans. Crestwood funded the acquisition through a combination of borrowing under its revolving credit facility and the issuance of an additional $235 million of preferred equity to Crestwood Niobrara’s existing preferred equity investors, led by Global Infrastructure Partners. Crestwood expects the transaction to be leverage neutral to the Crestwood balance sheet and immediately accretive to distributable cash flow per unit in 2019, with growing accretion thereafter based upon Chesapeake’s current development activity. The transaction, which was not subject to regulatory approval, is closed with an effective date of April 9, 2019.
Positions Crestwood to be leading G&P company in Powder River Basin: Crestwood immediately doubles its position in one of its core, high-growth assets, becoming one of the largest gas processing companies in the basin, with opportunity to expand commercial services to undedicated third-party operators
Strong cash flow growth at attractive valuation: Crestwood expects the Jackalope assets to contribute annual cash flow of $100 million in 2019 and growing to approximately $150 million by 2021
Achieves strategic financial goals: The acquisition coupled with the committed financing plan improves Crestwood’s DCF per unit growth profile to greater than 20% through 2020 while maintaining financial flexibility and balance sheet strength with an expected leverage ratio of 3.5x to 4.0x by first half of 2020
Committed financing at an attractive cost of capital: Issuance of additional preferred equity to existing Crestwood Niobrara investors to fund ~50% of purchase price allows Crestwood flexibility to continue executing its strategic plan without accessing public equity to fund growth capital in 2019 and 2020; $200 million accordion available from Crestwood Niobrara preferred investors for future growth projects in the Powder River Basin
Secures operatorship to drive cost reductions and commercial synergies: By aligning field operations, project management and commercial efforts under one common operator, Crestwood expects to significantly enhance the competitive position of its Powder River franchise. Additionally, Crestwood will retain all of the high-quality employees currently operating the assets and expects to reduce Crestwood Niobrara expenses by approximately $6 million to $8 million annually through assuming the role of operator.
“Today’s announcement marks a key step in Crestwood’s long-term growth objectives to accretively build meaningful scale in a core franchise position, which offers substantial producer development growth potential while positioning Crestwood to be one of the largest G&P service providers in the highly prolific Powder River Basin,” said Robert G. Phillips, Chairman, President and Chief Executive Officer. “We would like to thank Williams for what has been a very strong partnership over the last several years and welcome all of the highly-talented employees that will join Crestwood as part of the transaction. Consistent with all of our assets that we operate around the country, we will reaffirm our commitment to safe and reliable operations while providing best-in-class customer service for the producers that we service in the basin.”
Mr. Phillips continued, “In the midstream business it is rare to find a high-quality acquisition within an existing asset footprint that offers immediate accretive returns, enhances our leverage profile and financial strength, and strengthens our midstream value chain service offerings to our customers, all at an attractive valuation. By already owning 50% of the Jackalope system, our teams have an in-depth understanding of the economics of the Powder River Basin, the development plans and corresponding capital requirements for our existing and prospective customers, and the long-term prospects for future growth on and around our Jackalope system, all of which uniquely positioned Crestwood to capitalize on this opportunity. Furthermore, today’s transaction is consistent with our ongoing strategy to expand our core growth assets through prudent investments in accretive, high return capital projects that meet our strict investment hurdles. Our goal is always aimed to generate long-term value for our investors and we are confident this transaction, through bolstering Crestwood’s position of generating peer group leading DCF per unit growth while building balance sheet strength, will do just that.”
Powder River Basin Update
The Jackalope assets are located in Converse County, Wyoming, and provide gathering, compression and processing services and include the Jackalope Gas Gathering System and the Bucking Horse Processing Plant. The system is supported by a 358,000 acreage dedication by Chesapeake and a 30,000 acreage dedication by Panther Energy. The Bucking Horse and Jackalope assets are currently undergoing extensive expansion projects to increase gathering and processing capacity to 345 MMcf/d. These expansion projects, including line looping and system compression, are expected to be substantially complete in the first quarter 2020.
Currently, the Jackalope system is averaging gathering volumes of 140.0 MMcf/d, an increase of 12%, compared to 125.5 MMcf/d in the fourth quarter 2018. Crestwood expects continued volume growth on the system as Chesapeake plans to operate five to six rigs in the basin targeting the highly prolific Turner formation. In the fourth quarter 2018, Chesapeake drilled its highest producing Turner formation well to date achieving a 24-hour initial production rate of approximately 3,100 barrels of oil equivalent per day. Chesapeake has announced plans to further delineate and test other production benches, such as the Niobrara and Parkman during 2019. Based on current rig activity and growing initial production volumes, Chesapeake expects to double system volumes in 2019.
Powder River Basin Minimum Revenue Guarantee and Revenue Recognition
The Bucking Horse gas processing plant and the Jackalope gas gathering systems are supported by a 20-year fixed fee gathering and processing agreement with Chesapeake that includes a minimum revenue guarantee provision that allows for a higher fixed fee until a certain cash flow threshold is obtained. Once the minimum revenue guarantee threshold is achieved the fixed rate will adjust to a lower fee. Under FASB’s ASC 606 revenue recognition guidance, Crestwood utilizes an average blended flat rate over the life of the contract to recognize revenue in its GAAP financial statements.
As a result, the actual cash Crestwood receives from Jackalope will be substantially higher than what it will recognize in consolidated revenues and Adjusted EBITDA. For 2019, that variance between actual cash flows and recognized revenues is expected to be approximately $20 million. While Crestwood will not adjust for this difference in its reported Adjusted EBITDA, Crestwood will adjust its calculation of distributable cash flow available to common unitholders for this difference going forward as it provides a more accurate depiction of Crestwood’s available cash. In addition, when reporting its financial leverage ratio, Crestwood will make the same adjustment for actual cash flow from Jackalope instead of reported Adjusted EBITDA in accordance with the covenants in its credit agreement.
Evercore acted as financial adviser to Crestwood and Vinson & Elkins served as legal counsel to Crestwood. Crestwood posted an updated investor presentation to its website that contains additional information on today’s announcement.
Non-GAAP Financial Measures
Adjusted EBITDA and distributable cash flow are non-GAAP financial measures. The accompanying schedules of this news release provide reconciliations of these non-GAAP financial measures to their most directly comparable financial measures calculated and presented in accordance with GAAP. Our non-GAAP financial measures should not be considered as alternatives to GAAP measures such as net income or operating income or any other GAAP measure of liquidity or financial performance.
About Crestwood Equity Partners LP
Houston, Texas, based Crestwood Equity Partners LP (NYSE: CEQP) is a master limited partnership that owns and operates midstream businesses in multiple shale resource plays across the United States. Crestwood Equity is engaged in the gathering, processing, treating, compression, storage and transportation of natural gas; storage, transportation, terminalling, and marketing of NGLs; gathering, storage, terminalling and marketing of crude oil; and gathering and disposal of produced water.