Northland Power to acquire Empresa for $1.05B NORTHLAND POWER ANNOUNCES ACQUISITION OF COLOMBIAN REGULATED UTILITY BUSINESS FOR $1.05 BILLION AND CONCURRENT $315 MILLION EQUITY FINANCING
Northland Power Inc. has entered into an agreement to purchase a 99.2-per-cent interest in the Colombian-regulated utility Empresa de Energia de Boyaca (EBSA) from Fondo de Capital Privado de Infraestructura Brookfield Colombia and BCIF Holdings Colombia II SAS for 2,665 billion Colombian peso ($1.05-billion (Canadian)), including existing debt and subject to certain purchase price adjustments following receipt of final approval of EBSA's tariff by the Colombian energy and utility regulator.
Highlights
Ebsa transaction highlights
Expands Northland's Latin American platform into the growing Colombian electricity sector
Marks Northland's entry into the regulated utility industry complementing its existing portfolio of contracted power assets
Adds a business that is the sole electricity distributor to a population of over 1.3 million residents
Offers a highly predictable revenue and cash flow profile, inflation protection and growth from its regulated rate base
Establishes a platform for further growth across all electricity segments in Colombia due to EBSA's specific grandfathered regulatory rights
Generates average mid-single digit accretion to Free Cash Flow per Share during the current regulatory period ending 2023 and increasing accretion over the long-term
Is prudently financed in-line with Northland's investment principles and strong credit rating providing ample flexibility to fund future growth initiatives
"The Acquisition builds on our presence in Latin America and gives us an entry point into Colombia, a target market with a stable economy, growing middle class, strong rule of law and ease and transparency of doing business" noted Mike Crawley, Northland's President and Chief Executive Officer. "We are thrilled to be acquiring this high-quality regulated Colombian utility. EBSA operates in a stable regulatory framework offering an inflation-protected perpetual cash flow profile and serves as a platform for future growth."
Expands Northland's Latin American Energy Infrastructure Business into Colombia
EBSA is Northland's second investment in Latin America following the start of construction of its 130 MW La Lucha solar project in the State of Durango in Mexico in May 2019, and is an attractive entry point into the Colombian energy market.
Colombia is the 3rd largest population center in Latin America with nearly 50 million residents and a growing middle class. Colombia has experienced strong economic growth with real GDP growth averaging 3.5% over the past 10 years and over 400% growth in foreign direct investment since the early 2000s.
Colombia is a member of the Organization for Economic Co-operation and Development and a highly creditworthy jurisdiction, maintaining an investment grade credit rating as assessed by S&P (BBB-), Moody's (Baa2) and Fitch (BBB) since 2011. Strong economic and demographic fundamentals coupled with a supportive government and prudent fiscal policies are expected to support significant investment in the infrastructure sector in the coming years.
EBSA is one of a few energy companies in Colombia with favourable grandfathered rights allowing for vertical integration and participation in all segments of the electricity supply chain. With its grandfathered status and strong management team, EBSA will allow Northland to participate across the energy infrastructure spectrum in Colombia.
Adds a High-Quality Regulated Utility Business
EBSA is the sole electricity distribution company for the department of Boyaca, a prosperous region located near the capital, Bogota, with abundant natural resources and a growing economy supported by agricultural, mining, and industrial industries. EBSA serves a population of 1.3 million residents across 123 municipalities and is one of the ten largest electricity distributors in Colombia.
EBSA has a strong track record of executing value enhancing projects in the distribution and transmission segments, improving operating performance and customer service. Key management team members have been with EBSA for an average of 16 years and are expected to lead EBSA going forward.
EBSA operates under a regulatory framework with the majority of revenue derived from its regulated utility business. The current remuneration methodology for the distribution sector provides distributors with substantially fixed remuneration based on net depreciated assets, inflation indexation based on an established Colombian price index, and an average approved WACC of approximately 11.5%.
Based on the current tariff application, EBSA's rate base for 2019 is approximately COP 1,600 billion ($630 million). EBSA's regulated rate base is expected to grow through regulatory inflation indexation and net rate base investments which are expected to be self funded through cash from operations and non-recourse debt.
Strong Financial Contribution
The Acquisition is an important step in further diversifying Northland's portfolio by adding a perpetual utility infrastructure business in Latin America to its high-quality portfolio of contracted electricity generating facilities in North America and Europe.
Based on the submitted tariff, EBSA is expected to contribute Adjusted EBITDA in 2020 of approximately COP 255 billion. At the current COP exchange rate of 2,540, the equivalent Canadian dollar Adjusted EBITDA is approximately $100 million.
The Acquisition is expected to generate average mid-single digit accretion to Free Cash Flow per Share during the current regulatory period ending 2023, and increasing accretion over the long-term.
Prudent Financing Plan
The Acquisition will be funded initially with a fully committed 12-month $1.1 billion bridge facility. Northland's long-term financing plan for EBSA is designed to be consistent with Northland's strong investment grade credit rating. Northland intends to permanently finance the Acquisition and related expenses through:
$315 million of gross proceeds in common equity via a concurrent bought deal public offering of subscription receipts (the "Subscription Receipts"), before any exercise of over-allotment option. As described in more detail below, each subscription receipt will entitle the holder to receive one common share of Northland upon closing of the Acquisition,
$450 to $500 million of non-recourse debt financing supported by the EBSA business which is expected to be arranged shortly after the anticipated closing of the Acquisition, and
the balance of the Acquisition will be funded with cash on hand and borrowings under Northland's corporate credit facilities.
To mitigate the effects of exchange rate movements, Northland expects to issue a portion of the non-recourse debt in Colombian Pesos, and to implement a rolling multi-year currency hedging program for remaining free cash flow subject to exchange rate fluctuations.
Approvals & Timetable
The Acquisition Agreement includes customary closing conditions as well as a closing condition for receipt of final approval of EBSA's tariff by the Comision de Regulacion de Energia y Gas ("CREG"), the Colombian energy and utility regulator. The Acquisition purchase price is subject to certain adjustments based on the final tariff approved by CREG, which are intended to protect Northland's economic return in the event of a change in the overall tariff.
Northland expects receipt of the tariff approval by CREG in the coming months and closing of the Acquisition in the fourth quarter of 2019.
Subscription Receipt Offering
Concurrent with the announcement of the Acquisition, Northland entered into an agreement with a syndicate of underwriters (the "Underwriters") co-led by CIBC Capital Markets and National Bank Financial pursuant to which the Underwriters have agreed to purchase on a bought deal basis an aggregate of 12,990,000 Subscription Receipts at an offering price of $24.25 per Subscription Receipt (the "Offering Price") for total gross proceeds of $315 million (the "Offering"). Each Subscription Receipt will entitle the holder to receive one common share of Northland upon closing of the Acquisition. In connection with the Offering, Northland has granted the Underwriters an over-allotment option, exercisable in whole or in part, at any time for a period of 30 days following the closing of the Offering, to purchase up to an aggregate of an additional 1,299,000 Subscription Receipts at the Offering Price. The Offering is expected to close on September 18, 2019.