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Laclede Buying Southern Union Utilities in $1B Deal

The Laclede Group Inc. is buying Southern Union Co.'s Missouri Gas Energy (MGE) and New England Gas Co. (NEG) utilities for $1.035 billion in cash and debt. Southern Union was purchased earlier this year by Energy Transfer Equity LP (ETE) an affiliate of Energy Transfer Partners LP (ETP), which focuses on the midstream.

The price is composed of $1.015 billion in cash and nearly $20 million of assumed NEG debt. The utilities had combined revenues of $517 million for the 12 months ended Sept. 30, Laclede's fiscal year end. The utilities serve more than 500,000 customers in western Missouri and more than 50,000 in Massachusetts. No shareholder or unitholder approval is required.

The deal was the first of two gas utility acquisitions announced last week; the parent of Peoples Natural Gas also said it was acquiring Equitable Gas Co. (see related story).

"This investment is transformative for Laclede in accelerating our growth strategy. It provides the opportunity for us to leverage our shared-services approach, larger scale and operational expertise to increase the value we provide to both shareholders and customers," said Laclede CEO Suzanne Sitherwood. "MGE and NEG will effectively double our size by increasing our utility customer base from approximately 630,000 to nearly 1.2 million in an industry and a state in which we have over 150 years' experience.

St. Louis, MO-based Laclede said it expects the transaction to be neutral to earnings per share in the first full year after closing and accretive thereafter. The deal is expected to close before the end of the third calendar quarter of 2013, subject to conditions, including antitrust clearance and approvals from the Missouri Public Service Commission (MPSC) and the Massachusetts Department of Public Utilities.

Laclede Group owns Laclede Gas Co., the largest gas distribution utility in Missouri, serving 631,000 residential, commercial and industrial customers in the City of St. Louis and ten other counties in eastern Missouri. Its primary nonregulated activities include Laclede Energy Resources Inc., a natural gas marketer in St. Louis.

"These utilities are ideal in terms of size and scope," Laclede said of the companies it is acquiring. "By leveraging Laclede's core gas utility expertise and further expanding its footprint, it will be able to support growth initiatives in new markets with new customers. In addition, with a significantly larger market capitalization and enterprise value, the company expects to have improved trading liquidity and better access to the capital markets."

MGE serves Kansas City, MO, and the surrounding area and is the second largest local distribution company (LDC) in the state after Laclede Gas. Its acquisition by Laclede gives the company the state's two largest LDCs. The pro forma customer mix is 91% residential and 9% commercial and industrial, Laclede said.

MGE can access five interstate pipelines carrying gas from the Rockies and Midcontinent supply basins. It has 18 Bcf of contracted gas storage capacity and about 13,000 miles of main and service lines.

In New England, NEG serves the Fall River and North Attleboro areas of southeast Massachusetts. Its customer mix is 92% residential, 7% commercial and industrial and 1% transportation. The LDC can access Gulf Coast and Appalachian supply basins via five interstate pipelines. It has 1 Bcf of gas storage capacity, about 150,000 Dth of liquefied natural gas storage capacity, and about 2,000 miles of mains and service lines.

During the first quarter of this year ETE completed its acquisition of Southern Union (including the two utilities), creating a midstream company with more than 44,000 miles of interstate natural gas pipelines and an estimated 30.7 Bcf/d of transportation capacity (see Daily GPI, March 27). Affiliated partnership ETP followed this deal with the acquisition of Sunoco Inc. for $5.3 billion in a deal intended to diversify the natural gas midstream player's business by adding transport of heavier hydrocarbons such as crude oil, natural gas liquids and refined products (see Daily GPI, May 1).

"This transaction continues our efforts to streamline and integrate our asset portfolio through the divestiture of noncore assets," said ETP CEO Kelcy Warren said of the sale of the two utilities. "We are pleased to be selling to a buyer that remains committed to maintaining high standards of service quality and operational excellence for the customers and employees of Missouri Gas Energy and New England Gas Co."

The acquisition is expected to be immediately accretive to Laclede cash flow, would increase the company's share of earnings generated from regulated utility operations and would support the dividend, it said.

The deal is supported by a fully committed $1.020 billion bridge facility with Wells Fargo Bank, National Association, as well as existing company cash, Laclede said. Permanent financing is anticipated to be a combination of long-term debt and equity.

Moody's Investors Service lowered its outlook on Laclede Group and Laclede Gas Co. ratings to negative from stable over concerns about how the transaction would be financed and the amount of debt that would be incurred.

"Laclede Group is paying a big premium for a once-in-a-lifetime opportunity to buy its neighbor," said Moody's Vice President Mihoko Manabe. "Consolidated debt could more than double, while incremental cash flow will increase less."

The $1 billion-plus acquisition will more than double Laclede Group's book capitalization, which stood at about $1 billion at its Sept. 30, 2012 fiscal year-end, Moody's said. "If the company were to issue debt for half of the cash consideration, the amount of incremental debt would exceed the roughly $400 million of debt that [Laclede Group] reported at fiscal year-end 2012," the ratings agency said.

"To resolve the negative outlook, Moody's will need to assess how much equity and debt the company will raise, and which entity or entities will issue that incremental debt. Moreover, Moody's will need greater clarity around the pro-forma organizational structure, including whether MGE and NEG will reside under, or be merged into Laclede, or become first-tier subsidiaries under [Laclede Group]."

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