ArcLight Capital Partners LLC, which controls the general partner of American Midstream Partners LP (NYSE: AMID), intends to drop down 25% of ArcLight’s 51.7% controlling interest in Delta House, a fee-based, semisubmersible floating production system (FPS) and associated oil and gas export pipelines in the deepwater Gulf of Mexico to American Midstream.
Delta House was financed in December 2012 by an equity consortium led by ArcLight and began operations in the second quarter of 2015, at which point ArcLight and American Midstream began formal discussions regarding the proposed drop down. American Midstream executives worked with ArcLight to source and execute the Delta House project, which complements American Midstream’s strategic focus on the eastern Gulf of Mexico where the Partnership is pursuing additional, related opportunities.
American Midstream and ArcLight anticipate closing the drop-down transaction before year-end 2015 at a purchase price of $162 million. ArcLight’s remaining interest in Delta House is potentially available for future drop-down transactions, depending on market conditions and other factors. Total acquisition consideration for the transaction equates to an adjusted EBITDA multiple of approximately five times for the next 12 months and full-year 2016. At its current unit price, the Partnership anticipates financing the transaction without accessing the public equity markets.
“The drop down of an initial interest in Delta House will complement our existing eastern Gulf of Mexico operations and further expand our footprint into the operating core of the Mississippi Canyon,” said Steve Bergstrom, executive chairman, president, and CEO of American Midstream Partners. “Acquiring the interest in Delta House will increase our size and scale through incremental fee-based cash flows supported by long-term contracts and life-of-lease dedication. We expect the drop down to be completed at a multiple that results in immediate accretion, and we intend to recommend to the board the resumption of annualized distribution increases of approximately 5% upon closing the drop down.
“With our existing portfolio of organic growth projects, combined with the potential future drop down of a 50% interest in Republic Midstream and the potential future drop down of ArcLight’s remaining interest in Delta House, we now have line-of-sight to approximately $1 billion of fee-based growth through 2017.”
Delta House is operated by LLOG Exploration Offshore LLC and is in the Mississippi Canyon region of the deepwater Gulf of Mexico, with nameplate processing capacity of 80,000 barrels of oil per day (bbl/d) and 200 million cubic feet of gas per day (MMcf/d), and peak processing capacity of 100,000 bbl/d and 240 MMcf/d, respectively.
Cash flows for Delta House are supported by a 100%, volumetric-tiered fee-based tariff structure with ship-or-pay components and life-of-lease dedications. The tiered-fee structure of Delta House incentivizes front-end loaded volumes from producer customers, with production supported by tolling agreements with various producers.
Delta House began operations in April and currently has six wells online with eight wells scheduled to be online by the end of 2015. Additional wells are in various stages of drilling and completion and are anticipated to be connected to the FPS in 2016 and beyond, and, as a result, the FPS is expected to operate at approximately nameplate capacity for a minimum of four years.
A Conflicts Committee of the board of directors of the general partner of the Partnership, comprising independent directors, along with the full board of directors of the general partner, has unanimously approved the transaction.
Evercore Partners served as exclusive financial advisor to the Conflicts Committee and provided a fairness opinion for the drop-down transaction. Thomson & Knight LLP served as legal counsel to the Conflicts Committee. BofA Merrill Lynch served as exclusive financial advisor, and Latham & Watkins LLP served as legal counsel to ArcLight.