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.
Construction of the 30 inch, 121 mile long transmission pipeline is planned to commence in the second half of 2014. The project is scheduled to become operational by March 2015. The pipeline will transport at a minimum 650,000 dekatherms of natural gas each day, which is same as supplying natural gas to 3 million households on a daily basis.
The construction of this natural gas transmission pipeline will also open the doors for future economic growth in the respective covered area. Once the pipeline becomes operational, the economic impact is estimated to be $13.1 million coming from new annual sales, income and property tax revenue in the subject region.
WGL Holdings Inc (NYSE:WGL) will own a 10% share in the pipeline venture, via its subsidiary CEV.
Ameren Corp (NYSE:AEE) is also another player in the industry. The company is planning to invest $330 million for the development of the natural gas infrastructure in terms of integrity, safety, and reliability of the natural gas distribution system during a 10 year horizon. The residential customers will be charged an additional one cent each day for the improved service over the ten year term. This will generate higher revenues for the investing companies and at the same time, customers will be able to derive more benefit from the service provided.
Final snapshot
Laclede Group is likely to report higher earnings in the future as the company extracts the estimated synergies from its acquisition of Missouri Gas. This transaction also supports dividend growth, thus providing a source of regular income for its investors. Based on the above analysis, I would advise buying and holding the stock of Laclede Group Inc (NYSE:LG) for medium term.
The new investment made by WGL is expected to increase the company’s revenues and profits in 2015 and beyond. In my opinion, this company is recommended for investors who can lock their investment for the next few years. The company also provides regular dividend income.
The article Laclede Just Doubled Its Market Presence originally appeared on Fool.com and is written by Awais Iqbal.
Awais Iqbal has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Awais is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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