Southern Co. locks down its natural gas future with AGL mega-deal

By Kristi E. Swartz | 08/25/2015 07:38 AM EDT

Southern Co. has solved its problem of not having enough natural gas infrastructure by buying the nation’s largest “pipes only” company.

Southern Co. has solved its problem of not having enough natural gas infrastructure by buying the nation’s largest "pipes only" company.

The utility giant said yesterday it will buy AGL Resources Inc., the largest natural gas distributor in the United States. The deal doubles the customer base for both Atlanta-based corporations and gives Southern access to 80,000 miles of natural gas pipelines.

The move represents a continued evolution for the companies, both headed by CEOs who are well-respected in their industries, and throws open the door to a wide variety of business opportunities, especially outside the Southeast.


"This increases our opportunity to compete in critical energy offerings," Southern Co. CEO Tom Fanning said in a conference call with analysts.

Southern can use AGL’s long-standing expertise in natural gas to explore pipeline opportunities and potentially other lines of business outside its Southeast territory. AGL, already growing because of the robust natural gas industry, will have even more access to capital to fund additional pipeline projects.

"With this scale and scope, we have very large opportunities," John Somerhalder II, AGL’s CEO, said at a news conference later in the day.

Southern sees gas as key to supporting its four electric utilities in the Southeast and growing the business elsewhere. The once coal-heavy utility has transitioned from getting 16 percent of its fuel from natural gas to 48 percent, and its average daily consumption is expected to increase from 1.8 billion cubic feet a day to 2.2 billion cubic feet a day by 2020.

This growth has made Southern the third- or fourth-largest natural gas consumer in the United States, and that figure is poised to increase. Low natural gas prices coupled with advanced gas technologies and federal environmental rules all are creating a need for more gas.

Fanning has frequently called out the lack of natural gas infrastructure as one reason why electric utilities will have trouble transitioning away from coal to natural gas and renewables to meet federal environmental targets. Once calling it "the rush to gas," Fanning said the lack of pipes to get gas to electric utilities would drive up prices for consumers.

"Sufficient infrastructure is not there," he said.

The company also needs gas as it continues to add solar and wind across its territory and nationwide. Fanning said roughly 1 megawatt of natural gas is needed for every 1 MW of solar and wind, which are intermittent.

The issue is having enough backup generation on hand for when those alternative fuels aren’t able to operate.

Each of Southern’s utilities in Alabama, Florida, Georgia and Mississippi is adding solar and wind to its portfolios, and the company’s wholesale unit, Southern Power, has more than 1,200 MW of renewable generation either planned or operating.

"Clearly, as the United States is pushed toward a greater share of renewables, we think that is a great thing, and we want to be a leader," Fanning told EnergyWire. "We will need more gas resources to go along with those projects, and we intend to be a player there, as well."

Enter AGL, which moves gas from one place to another but does not sell it. The company currently is involved in major pipelines to deliver natural gas to its utilities, other power companies, industrial users or distributors (EnergyWire, Nov. 13, 2014).

At least two of those projects have the potential to help Southern’s Georgia Power operations. One is an expansion of a pipeline in north Georgia. The other, the Atlantic Coast Pipeline, is filling demand in North Carolina and Virginia, but Somerhalder said the potential exists to expand into Georgia.

"We’ll obviously look over time to see whether that project makes sense to serve additional loads," he said, noting that would require buy-in from the pipeline’s other main partners.

New territories

While Southern may be better known, AGL has been growing in its own right. The company bought Illinois-based Nicor Inc. in 2011, expanding its reach into the Midwest. AGL owns natural gas distribution companies in seven states: Florida, Georgia, Illinois, Maryland, New Jersey, Tennessee and Virginia.

Fanning praised AGL’s management and the company’s strong financial integrity throughout the day.

Both companies are eyeing projects that aren’t in the Southeast. In fact, that was the basis of a February dinner meeting between Fanning and Somerhalder that eventually led to their discussion of Southern buying AGL.

Fanning said he reached out to Somerhalder to get his advice on some potential pipeline project opportunities. Eventually, the two realized combining companies would make sense, he said.

"The combined company will be able to compete for more and larger companies and further increase gas supply," Fanning said.

Somerhalder said most of AGL’s near-term investments likely will be in more pipelines. Other opportunities include more natural gas storage. For Southern, Fanning said the company is looking at pipeline projects in the Henry Hub region, which is west of its core territory, as well as the Marcellus Shale area.

Southern and AGL made their joint announcement after the boards of both companies approved the deal. Southern will buy AGL for $8 billion in cash, but the companies said the deal has an enterprise value of $12 billion.

"We have a great growth platform and an ability to grow our business and invest in our business, so we did not need to do this," Somerhalder told EnergyWire. "But we think we’ll be one step in better shape with the demand that Southern Co. brings. With the capital that they bring, we can even take things to the next level."

The addition of AGL will create the nation’s second-largest utility by customer base with roughly 9 million customers.

It also will boost Southern’s long-term earnings growth to between 4 and 5 percent, the company said.

The deal must move through some state and federal regulatory approvals before it closes. AGL’s shareholders also have to approve the transaction. Each company will operate separately until then.

AGL will keep its corporate headquarters, management team and board.