Kinder Morgan Inc.’s (KMI) $1.8 billion purchase of NextEra Energy Partner’s (NEP) South Texas pipeline assets was motivated by a need to keep pace with an expanding natural gas market.

“KMI is implying some growth in 2024 and forward year’s EBITDA, likely from the midstream assets where it is also likely to generate synergies,” Sunil Sibal, senior analyst for Seaport Research Partners, wrote in a Nov. 8 commentary.

The purchase, announced Nov. 6, transfers ownership of NextEra’s STX Midstream, which includes 462 miles of large diameter, high-pressure natural gas pipelines connecting the Eagle Ford Shale to Mexico and Gulf Coast markets.

Kinder Morgan and NEP had both signaled earlier in the year that a deal was coming.

Kinder, NextEra Gas Pipelines
Kinder, NextEra gas pipelines. (Source: Rextag)

During Kinder Morgan’s third-quarter earnings call in October, CEO Kim Dang noted that the company was looking to expand its natural gas infrastructure along the Gulf Coast and in South Texas specifically to keep up with gas production and new production facilities coming on-line.

“So you’ve got the next decade down in South Texas. So that is going to require incremental pipeline infrastructure, probably,” Dang said.

In May, John Ketchem, NextEra’s chairman, president and CEO, announced plans to sell its STX assets by the end of the year as part of a move into a fully renewables-based company. The company also plans to sell its Meade natural gas pipeline in Pennsylvania, but not until 2025.

In his analysis of the deal, Sibal said Kinder Morgan agreed to pay the $1.82 billion with an expected EBITDA multiple of about 8.6x for 2024, which would then fall to about 7.0x to 7.5x in the long term.

“NEP indicated that assets are expected to generate about $181 million EBITDA in 2023, with 70% coming from transmission assets and 30% from the midstream asset,” he said.

The deal is expected to close in first-quarter 2024.

The STX network consists of three primary sections. STX owns a 90% interest in the NET Mexico pipeline, while Pemex affiliate MGI Enterprises owns 10%. STX owns and operates the Eagle Ford Midstream, a 158-mile line connecting the Eargle Ford to the Agua Dulce Hub in Nueces County, Texas. STX Midstream also owns a 50% interest in the 62-mile Dos Caminos, which it shares with Howard Energy Partners in Webb County, Texas.

Kinder Morgan said the assets are highly contracted, with the average contract length lasting more than eight years. The network’s current capacity is 4.9 Bcf/d.

The midstream acquisition was Kinder Morgan’s sixth in the past three years.

NextEra said it plans to use the proceeds from the sale to pay off STX’s outstanding debt and associated interest-rate swaps of about $425 million and complete a $1.1 billion buyout for NEP Renewables II CEPF. 

“As a financing vehicle, it is important that NextEra Energy Partners regains a competitive cost of capital,” Ketchum said regarding the deal. “By addressing the majority of our [NEP Renewables II] CEPF equity buyout obligations through 2026, we believe this transaction is a critical next step in positioning the partnership for success going forward.”

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