Chesapeake Utilities Corporation and Gatherco, Inc. announced that they have entered into a merger agreement, dated as of January 30, 2015, under which Chesapeake Utilities will acquire Gatherco.
Upon consummation of the transaction, Gatherco will merge into Aspire Energy of Ohio, LLC, a wholly-owned subsidiary of Chesapeake Utilities. The transaction was approved by the Gatherco Board of Directors and by Chesapeake Utilities' Merger and Acquisition Committee. The merger, which is expected to close in the second quarter of 2015, is subject to approval by the Gatherco shareholders. Chesapeake Utilities stockholder approval of the merger is not required. Management expects the transaction to be accretive in 2016 - the first full year of operation following the merger.
The transaction has an aggregate value of approximately $59.2 million, inclusive of the following:
- $49.8 million in exchange for all outstanding shares of Gatherco common stock, paid as follows:
593,005 shares of Chesapeake Utilities common stock, valued at $29.9 million, and
$19.9 million in cash (before payment of certain transaction expenses and escrow deposits);
$7.7 million in cash in consideration for cancellation of all outstanding Gatherco stock options; and assumption of Gatherco's debt at closing, estimated to be $1.7 million.
Gatherco is a natural gas infrastructure company providing natural gas midstream services. Gatherco was established in 1997 in conjunction with the acquisition of Columbia Gas Transmission's natural gas gathering assets in Ohio. Gatherco's assets include 16 gathering systems and over 2,000 miles of pipelines in Central and Eastern Ohio. Gatherco provides natural gas gathering services and natural gas liquid processing services to over 300 producers, and supplies natural gas to over 6,000 customers in Ohio through the Consumers Gas Cooperative, an independent entity which Gatherco manages under an operating agreement.
At the close of the transaction, Gatherco, as merged into Aspire Energy, will continue to operate as a separate business unit, reporting to Elaine B. Bittner, Chesapeake Utilities' senior vice president of strategic development.
Expected Benefits of the Transaction
The transaction is expected to provide the following benefits:
- Investment in new midstream unregulated energy opportunities with higher return potential. Chesapeake Utilities' current business includes both midstream and downstream natural gas operations. Eastern Shore Natural Gas Company, the Company's interstate pipeline subsidiary, and Peninsula Pipeline Company, the Company's Florida intrastate pipeline subsidiary, collectively represented approximately 30 percent and 28 percent of Chesapeake Utilities' total investment and net income as of the 12 months ended September 30, 2014, respectively. In addition, Chesapeake Utilities has owned and operated several unregulated energy businesses, going back as far as the early 1980s. These unregulated energy businesses have been complementary to the Company's utility operations and have generated returns higher than traditional regulated returns. The Gatherco transaction is a new unregulated midstream energy opportunity that has the potential to yield higher than traditional regulated returns.
- Future Growth Potential. Gatherco, working in tandem with the Cooperative, will be identifying additional opportunities to provide natural gas service to new end use customers that can be served by the Cooperative and which are currently using propane and/or oil. Conversion of these users to natural gas represents an attractive source of potential future growth. Today, the Cooperative serves approximately 6,000 customers with another 150,000 potential customers for possible conversion.
- Expansion of footprint into a new geographic territory. Gatherco distributes natural gas to customers in over 40 counties throughout Ohio. The Gatherco acquisition will expand Chesapeake Utilities' footprint beyond its Delmarva Peninsula and Florida service areas.
- Long-term potential. The acquisition of Gatherco positions Chesapeake Utilities in the middle of the shale production area in Ohio. The portion of the shale basin in eastern Ohio is the newest, and therefore least developed, shale play in the U.S. Gatherco has an established footprint in this region. In the longer term, if economic, the footprint may provide Chesapeake Utilities a platform from which to capitalize on this potential opportunity.
The closing of the merger is subject to a number of conditions, including approval by Gatherco shareholders. Chesapeake Utilities will file with the U.S. Securities and Exchange Commission, a registration statement on Form S-4 to register the common stock that Chesapeake Utilities will issue to Gatherco's shareholders in connection with the merger. The registration statement on Form S-4 will also include a proxy statement relating to the Gatherco shareholder vote. Gatherco anticipates seeking shareholder approval to facilitate closing of the transaction in the second quarter of 2015.