Ladies and gentlemen, thank you for standing by, and welcome to the UGI Corporation Acquisition of Mountain New York Gas Company Conference Call. At this time, all participant lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.
I would now like to hand
the conference over to your speaker today, Tamika Morris, Director of Investor Relations. Thank you. Please go ahead, ma'am.
Thanks, Shannon. Good morning, everyone, and thank you for joining us. With me today are Tejas Trepski, CFO of UGI Corporation Bob Beard, Executive Vice President, Natural Gas and John Walsh, President and CEO of UGI. Before we begin, let me remind you that our comments today include certain forward looking statements, which management believes to be reasonable as of today's date only. Actual results may differ significantly because of risks and uncertainties that are difficult to predict.
Please read our annual report on Form 10 ks for an extensive list of factors that could affect results. Assume no duty to update or revise forward looking statements to reflect events or circumstances that are different from expectations. Now let me turn the call over to John.
Thanks, Tamika. Tamika recently became our Director of Investor Relations, and we're excited to have her as part of the IR team and know you will enjoy working with her. I hope everyone had a relaxing and healthy holiday season and have the chance to review our press release announcing this exciting opportunity to expand our natural gas line of business. Over the past 2 years, we've indicated our intention to rebalance our business mix by prioritizing investments in our natural gas businesses. The acquisition of Mountaineer certainly meets this objective, but more importantly, it gives us a decades long platform to make additional regulated investments focused on long term system enhancement.
This transaction is highly complementary UGI's existing utility footprint and aligns with our core mission to safely and reliably deliver clean and affordable energy solutions to our customers. Over the past 10 years, our existing utilities business has invested nearly $2,500,000,000 to ensure safe operations, system integrity, a reduction in carbon emissions and to provide customers with access to clean and affordable natural gas. These investments enable us to provide our customers with excellent service while also growing our rate base. We see a similar opportunity to invest capital to support system enhancement at Mountaineer for the next few decades. These investments will substantially grow rate base and ensure exceptional service levels for Mountaineer's customers.
Mountaineer's customers. Bob will speak more to this in a few moments. Acquiring Mountaineer increases our regulated customer base by approximately 30% and our rate base by approximately 14%. We feel very comfortable expanding our regulated footprint in the Mid Atlantic region. Similar to the environment in Pennsylvania, West Virginia has a very constructive regulatory environment and Mountaineer's customers have access to abundant low cost natural gas.
UGI remains committed to being the supplier of choice by providing the most affordable, reliable and resilient solutions for our customers. The acquisition is accretive to earnings in the 1st full year of combined operation, but that accretion grows over the next few decades as we execute on investment opportunities. This outlook is very similar to our Pennsylvania LDC with a clear investment platform extending for several decades. This long runway of regulated investments supports our commitment of 6% to 10% annual adjusted EPS growth and 4% dividend growth. We believe this transaction is a great strategic fit for UGI and on this slide we lay out 3 important areas that the Mountaineer acquisition addresses.
Certainly, the acquisition of an LDC helps to rebalance our portfolio mix, but it also provides many attractive investment opportunities, supports sustainable and growing cash flows and lowers our overall earnings sensitivity to weather. As we discussed on our last Investor Day call, UGI is building a platform for a renewable energy future. We believe that natural gas has a significant role to play in the renewable energy future. And as is the case for UGI Utilities, the planned infrastructure replacement at Mountaineer will sharply lower methane emissions. We look forward to discussing our fugitive methane emission reduction goals for Mountaineer on a future call.
We plan to assess other opportunities that support this goal as well, such as increasing compressed natural gas vehicles for the Mountaineer fleet and incorporating renewable natural gas into the supply portfolio. Mountaineer provides a solid foundation for further regulated growth. There is a large pipeline replacement program driving investment and rate base growth. West Virginia has a distribution modernization program known as the Infrastructure Replacement and Expansion Program or IREEP. Under IREEP, the majority of projected CapEx is recoverable with minimal regulatory lag.
The program functions much like the DISC mechanism in Pennsylvania and has the added advantage of including recovery for systems expansion in unserved areas. Lastly, we plan to accelerate customer growth expanding distribution systems into unserved and underserved areas of the service territory in a manner similar to our existing utilities' successful expansion programs. Bob will speak more to this in a few moments, but many of the opportunities at Mountaineer are very similar to our recent investments at our utilities business. Also, the customer demographics of our new customers in West Virginia are similar to our current customer profile in Pennsylvania. This gives us a great deal of confidence that we can execute on these plans in the future.
I'll now hand it over to Ted to discuss the transaction in more detail. Ted?
Thanks, John. I'd like to echo John's sentiment that we're very excited to announce this important transaction. We entered into the definitive agreement to acquire Mountaineer on December 29, 2020 for an enterprise value of 5 $40,000,000 including the assumption of Mountaineer's long term debt, roughly $140,000,000 Mountaineer's projected 2021 rate base is $378,000,000 This equates to multiple of about 1.4 times, which we think is very attractive given the long runway of infrastructure investments that John mentioned a few moments ago. UGI does not expect to issue any common equity as part of this transaction and plans to finance the acquisition through a combination of debt, equity linked securities like mandatory convertible securities and existing liquidity. As always, we will be financing this transaction with an appropriate mix to ensure we are optimizing accretion and maintaining a strong balance sheet.
John mentioned our intention to rebalance our portfolio to a more even split between natural gas and propane. In 2019, roughly 40% of our earnings were attributable to our natural gas businesses. The acquisition of Mountaineer accelerates the rebalancing of our earnings mix between natural gas and propane. The transaction is subject to customary regulatory and other closing conditions, including approval by the Public Service Commission of West Virginia. Federal antitrust clearance is also required pursuant to the U.
S. Hart Scott Rodino Antitrust Improvements Act. Assuming fulfillment of all conditions, the transaction is expected to close in the second half of calendar year 2021. With that, I'll turn it over to Bob to provide an overview of the Mountaineer and our new regulated footprint. Bob?
Thanks, Ted. I'll take just a moment to run through some of the specifics of the Mountaineer business. First, it's the largest gas LDC in West Virginia, serving roughly 215,000 customers across 50 of West Virginia's 55 counties. The company brings an exceptional management team with significant experience, a track record of safe operations and strong regulatory relationships. Mountaineer has approximately 470 full time employees and a history of excellent customer service.
As John mentioned, one of the many aspects that drew us to this opportunity is that West Virginia has a constructive regulatory and political landscape. Mountaineer is a fully rate regulated business with $378,000,000 in rate base projected by the end of 2021. Mountaineer operates approximately 6,000 miles of pipeline, about 1500 miles of which is bare steel. We see a significant opportunity to invest in the distribution system and replace approximately 25% of the entire pipeline system over the next few decades. John mentioned that UGI Utilities has invested more than $2,500,000,000 over the last 10 years to improve our distribution system and to grow our rate base.
Our pace of investment has increased sharply over the past 5 years, resulting in a safer, more reliable system, lower emissions and a growing rate base. As you can see on the chart to the right, our rate base is growing at a faster pace than it has historically, and we expect that higher growth rate to continue for quite some time. So clearly, UGI Utilities Capital investments will focus on safety and reliability, particularly the replacement of approximately 1500 miles of bare steel pipeline. Replacement of these facilities has been recognized as a priority and is encouraged by federal and state regulatory officials. We also anticipate additional capital investments in customer conversions, new business line extensions, IT and fleet.
We believe West Virginia has a positive environment for natural gas development with opportunities for increased industrial use of natural gas and longer term conversion to natural gas from other fuel sources. So taken together, we see a number of investment opportunities over the next several decades and expect a 10% to 12% rate base CAGR over the long term. The acquisition of Mountaineer expands our regulated footprint in the Mid Atlantic region and across the prolific Marcellus and Utica production areas. We have familiarity with this region, operating our UGI Appalachia assets and our AmeriGas operations across the state. We look forward to this opportunity to significantly expand our service to communities across West Virginia.
On the right, you can see that this transaction increases our total regulated customer base to nearly 1,000,000, increases total gas pipeline network to over 18,000 miles, adds over $50,000,000 to our annual CapEx program and increases our rate base to $2,750,000,000 It's important to note that the customer profile of our current rate payers is very similar to our expected customer base in West Virginia. For both our current customers and Mountaineer customers, their gas bill on average is less than 2% of their medium household income. Lastly, on the bottom of the slide, you can see the customer breakout of Mountaineer's very similar to our current utilities business with approximately 90% residential customers. Before I hand it over to John for closing remarks, I want to say that we're very excited about this opportunity and we look forward to welcoming the Mountaineer employees to UGI as we continue to provide safe and reliable natural gas service across West Virginia. With that, I'll turn it back to John.
Thanks, Bob. The acquisition of Mountaineer is a great strategic fit for UGI that advances and supports our key long term initiatives. It aligns with our goal to rebalance our business mix, focus on regulated investments and provide expanded opportunities to advance our offerings of renewable energy solutions. The transaction is accretive to earnings in our 1st full year of combined operations, but more importantly, we have the opportunity to invest and grow rate base over the long term. We have years of experience investing in infrastructure replacement, promoting safe operations and continuing to improve on a long history of providing outstanding customer service.
On behalf of all of us at UGI, I look forward to welcoming our new employees and serving our new customers in West Virginia. With that, I'll turn it back over to Shannon, who will open it up for your questions. Shannon?
Our first question comes from Richard Ciccarelli with Bank of America. Your line is open.
Hi, this is actually Harry on for Rajeev.
Yes. Yes, go ahead.
So just starting off, what exactly was the PE multiple of the transaction? And how accretive is the transaction in terms of EPS?
Thanks. This is John. I'll probably turn that one over to Ted. It's on the accretion, it's modestly accretive in the 1st full year. We'll finalize that certainly as we get the transaction from a capital standpoint closed, but a few cents accretive in the 1st full year.
But I'll turn it over to Ted to talk in more detail about the relevant multiples.
Sure. Good morning. Maybe first on the EV over rate base with an implied multiple of 1.4. We've gotten a number of questions on the underlying rate base. Just to point folks in the right direction, we are starting with a $258,000,000 rate base that was authorized in 2018.
And then we're taking public filings with the West Virginia Public Service Commission that show PPE growth and these iREP filings that do get us to about $380,000,000 in rate base. So that's how we did the math for the 1.4. We're going to hold off on implied PE multiples. We'll be working on finalizing the financing for this deal over the next few months. But to give a little bit of direction on EV over EBITDA, as we said several times in over over several decades.
And with that, we expect to see pretty significant growth in earnings. And so to give you an indication, if we looked at fiscal years 2022 through 2025 that would be our first full year plan period our first 4 year plan period. We're looking at our projections of low 60s and 1,000,000 in terms of EBITDA with an implied multiple that's under 9. And just to ground that in our 1st full year of operations, which would be 20 22, we're looking at an EV over EBITDA multiple of about 11.5 times. And so you can back into the EBITDA of what we expect to be in the high 40s.
Got it. That's helpful. Appreciate it. And just thinking about the capital structure plan for the pro form a regulated OpCo, given the 5 $40,000,000 enterprise value, it's $140,000,000 in debt. It's not exactly in line with the traditional fifty-fifty utility cash structure, utility like cash structure, what is does this imply that there's some additional debt?
I mean, I know you said you'd finance with debt and equity securities. How are you guys thinking about the capital structure of the pro form a combined regulated entity within your business of the longer term?
Yes. So
the 104 $1,000,000,000 is long term debt. What that doesn't include is the revolver capacity at Mountain Air. And that can go depending on the season and kind of low working capital season that could be just in single digits millions to high season where you're really leaning into working capital that hits as high as $60,000,000 So I think the math ends up looking a little bit different when you look at kind of the working average of how they draw down on revolver during the year, in addition to the $140,000,000 We'll be in terms of how we set up our capital structure, after we own the entity. We'll be looking into that. That's the work we're doing now in terms of how we're going to set up financing for this.
We'll be giving more direction on that in the coming months.
Got it. So should we assume it's pretty in line with how you guys have got those structural agreements fixed in utility?
Yes. I think kind of what you normally expect to see in utilities and the way we've approached it in Pennsylvania would be a pretty good indication of how we would expect to land.
Got it. Okay. And then if I could sneak one more in. Are you assuming any synergies the transaction in your in that EBITDA that you were talking about?
Yes. This is John again. This is not a synergy driven investment opportunity. It's primarily driven by what we see as a really well managed LDC with substantial opportunities for additional growth. We'll certainly look for the chance and the opportunity to share best practice, and we've done that with our acquisitions in the past and to in critical areas, safety, operational efficiency, etcetera.
So we're always looking for opportunities to be more efficient in terms of how we serve our customers and to be efficient in terms of rates. Really the opportunity here is to build and grow this business and that's the primary focus. And I'll let Bob comment as well.
Yes. Thanks, John. Yes, for sure. This is not a cost cutting exercise for us. If you look at what we've done in Pennsylvania, as we've increased our CapEx over the last 10 years, we've actually brought on additional field people and additional support staff to help support that activity.
So, a little bit different, I guess, than some folks would approach an acquisition like this. But for us, Mountaineer will remain a standalone company. Their financial results will roll up under the utilities arm at UGI Corporation. But to echo John's comments, no, this is not a cost cutting exercise. This is an opportunity that we see to continue to grow the system in West Virginia.
Got it. That's helpful. And just one quick clarification. And you're talking the EBITDA multiple implied EBITDA multiples. You said 9 times next year and then 11.5 times on 2022.
I just want to make sure I have that right. I was a little confused.
Yes. So for 2022, which we expect to be our 1st full year of owning and operating Mountaineer, we're looking at about an 11.5 multiple, which is underscored by EBITDA in the high 40s. The under 9 multiple, what we did was we laid out our projections for the first full the first four years that we'd be operating it. So, 20 2 through 25, that's our normal cycle of a plan. And the average that we expect to hit over that 4 year time period would be an EBITDA in the low 60s, and that would get you to an implied multiple under 9.
Got it. Thank you. I'll hop back in the queue. Appreciate your time. Thank you.
Thank you.
Thank you. And I'm currently showing no further questions at this time. I'd like to turn the call back over to John Walsh for any closing remarks.
Okay. Thank you very much for your time and attention this morning. As you can see from our comments, we're very excited about this opportunity and look forward to proceeding through the regulatory process. We'll certainly keep you updated on our progress as we move forward and we'll have an opportunity to do that when we speak to you early next month with our Q1 earnings call. So look forward to connecting then.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.