Recently, Laclede Group Inc (NYSE:LG) received the regulatory approval to acquire Missouri Gas Energy. The merger of these two major gas utility companies is likely to turn Laclede Group Inc (NYSE:LG) into a leading gas utility provider. Let’s take a look at the implications of this deal and analyze whether it has been a wise investment or not.
The acquisition of Missouri Gas: Has it added any accretive value?
This acquisition streamlines Laclede Group Inc (NYSE:LG)’s asset portfolio. This transaction was a part of the company’s strategy to achieve growth through investment in businesses that have similar operating model as Laclede and to leverage on its existing core gas distribution competence.
Laclede Group Inc (NYSE:LG) will now cater to the demand of an additional 500,000 customers of Missouri in about 30 western and central Missouri counties, along with its 630,000 clients. The acquisition of Missouri Gas will effectively increase the company’s size by 100%, in terms of its customer base, to 1.2 million.
Moreover, the purchase provides a strong geographical fit as the company will now supply natural gas in Missouri’s two largest metro areas. It has also raised the company’s storage capacity to 45 Bcf from 27 Bcf. The two organizations follow the same rate determination process and cater to the needs of a similar customer base. This increases the proportion of stable earnings. Also, Laclede will be able to avail the opportunity to accelerate pipeline replacement at Missouri.
With 91% of the company’s gas supplies serving the needs of residences, the expected rise in new housing starts in the coming years will boost the demand for natural gas in Missouri. This is expected to benefit Laclede Group Inc (NYSE:LG) immensely.
The utility companies had reported combined revenues and EBITDA of nearly $517 million and $238 million, respectively, for the twelve months ended September 30, 2012. Laclede Group Inc (NYSE:LG) forecasts earnings to remain neutral in the first year and add accretive value afterwards. However, it will add instantly to the company’s cash flows.
Other market players in the gas industry
WGL Holdings Inc (NYSE:WGL) also operates in the natural gas industry. The company sells and delivers natural gas, and provides energy-related products and services. It operates under four segments: Regulated Utility, Retail Energy-Marketing, Commercial Energy Systems, and Wholesale Energy Solutions.
Recently, WGL Holdings Inc (NYSE:WGL) committed $68 million funds to invest in Constitution Pipeline Company to take advantage of the abundant natural gas supplies in the U.S. WGL’s investment is part of its strategy implementation to grow its infrastructure assets.This venture aims to transport natural gas from the Marcellus region in northern Pennsylvania to major northeastern markets. The project is expected to provide additional earnings growth. The cash flows from this investment are quite certain as the project is fully contracted with long term agreements.
