UGI Corporation UGI has inked a deal to acquire Mountaintop Energy Holdings LLC, for an enterprise value of $540 million including $140 million of debt. This enterprise value represents 1.4 times projected 2021 rate base. The transaction is subject to customary regulatory and other closing conditions, and is likely to close in the second half of 2021.
The company will fund the buyout through debt or/and equity-linked securities along with existing liquidity instead of issuing equity. This will help it optimize accretion and also maintain a strong balance sheet.
The deal is likely to be accretive to the acquirer’s adjusted earnings per share (EPS) in the first full year of combined operations. This move will enhance the company’s regulated utility rate base and customers served by nearly 14% and 30%, respectively. It will further support the utility’s long-term earnings growth rate of 6-10% and 4% annual dividend growth. The transaction is in line with the company’s focus on growth investments in natural gas and renewable energy solution opportunities.
Moreover, Mountaineer which is owned by Mountaintop Energy, is likely to witness its rate base to grow at a CAGR of 10-12% over the long term. This, in turn, will boost UGI Corp.’s rate base.
Mountaineer will offer regulated investment opportunities in the future, which will not only improve the safety, affordability and reliability of the utility’s distribution system but also reduce its methane and greenhouse gas emissions. Further, the buyout will expand the company’s core utility operations in the mid-Atlantic region. Also, the deal opens a pool of significant investment opportunities, such as replacing more than 1,500 miles of bare steel pipelines and expanding the reach of natural gas in West Virginia to both unserved and underserved areas.
Prior to this, in November 2020, UGI Corp.’s unit UGI Energy Services, LLC expanded its renewable natural gas (RNG) portfolio by making investment in New Energy One HoldCo LLC. This investment is in sync with the utility’s objective of providing renewable and sustainable energy to its customers while reducing carbon emissions. To this end, earlier this year, Energy Services completed the acquisition of GHI Energy, LLC, a Houston-based company that markets renewable natural gas in California.
UGI Corp. continues to make systematic capital investments inaddressing the infrastructural need for various capital projects and carrying out acquisitions to curb competition. These investments also increase the safety and reliability of the company’s natural gas production and storage facilities, modernize its infrastructure as well as allow it to efficiently serve the expanding customer base. Remarkably, the company added 12,000 residential heating and commercial customers in fiscal 2020 compared with 14,000 customer wins in fiscal 2019.
After spending $706 million in fiscal 2019, UGI Corp. slashed its capital expenditure to $665 million in fiscal 2020 in view of COVID-19 impact. However, with return to normal level of activity and the easing of COVID- related restrictions, the company currently plans to invest $850 million in fiscal 2021. Such investments should bode well for the stock.
Zacks Rank and Key Picks
UGI Corp. currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same sector are DTE Energy Company DTE, Portland General Electric Company POR and Pinnacle West Capital Corporation PNW, each presently holding a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
DTE Energy, Portland General Electric and Pinnacle West Capital delivered a respective earnings surprise of 10.4%, 98.1% and 27.2%, on average, in the last four quarters.
The Zacks Consensus Estimate for 2020 earnings of DTE Energy, Portland General Electric and Pinnacle West Capital has moved 0.7%, 1.3% and 2.2% north, respectively, in the past 60 days.
In the past six months, its shares have gained 8.2%, outperforming the industry’s growth of 2.7%.
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