Southern’s gas future unclear after AGL deal

OREANDA-NEWS. August 28, 2015. Atlanta-based Southern Co.'s \\$8bn bid for cross-town gas utility AGL Resources marks one of the industry's biggest bets yet on the future of natural gas.

But aside from creating one of the largest utilities in the US, it's unclear what the immediate benefits of the buyout are for Southern, which must transition away from burning coal to a generating portfolio heavy with gas and renewables.

Southern will gain an interest in three large gas pipeline projects, storage assets and gas marketing that will increase its exposure to the growing US gas market. The combined company will have 9mn regulated gas and electric customers in nine states and will grow by 2020 to using more than 4 Bcf/d (113mn m?/d) of gas.

Southern's path is slightly different than other electric utilities that are defraying the risk associated with the rough-and-tumble gas market by directly investing in pipelines and production.

Power producer Dominion is developing the 550-mile (885km) Atlantic Coast Pipeline to gain access to low-cost Marcellus and Utica shale gas to supply a trio of new gas-fired power plants its Virginia Power utility is building. Duke Energy is a partner in that project and in a new pipeline to serve its Florida utility.

A unit of NextEra Energy plans to acquire NET Midstream which operates seven gas pipelines serving Texas and Mexico for \\$1.8bn. Other NextEra units are investing in Florida pipelines and in gas reserves to stabilize future fuel costs.

But exactly how Southern and AGL plan to capitalize on their combined assets remains to be seen.

AGL "at a modest scale, is already a participant in several major projects and has an experienced midstream management team," Fanning said. "We expect the combined company will be able to compete for more, and larger, opportunities in the future, and to further increase supply."

AGL owns seven gas utilities with about 4.5mn customers from Florida to New Jersey. It owns 80,000 miles of gas pipelines along with gas storage facilities in Louisiana, Texas and California. Other AGL subsidiaries buy gas and manage assets for wholesale customers which could help Southern manage growing fuel purchases.

Last year, AGL made investments in three large gas pipeline projects: becoming a 50pc-owner of the 106-mile Dalton Lateral pipeline designed to supply additional gas in northern Georgia; taking a 20pc interest in the 108-mile PennEast Pipeline project to move Marcellus gas to New Jersey; and a 5pc-stake in the Atlantic Coast Pipeline to serve West Virginia, Virginia and North Carolina.

AGL said it is negotiating with regulators in Virginia to invest in gas reserves.

For Southern, the AGL transaction may be more about improving near-term earnings and beefing up its customer base than AGL's gas infrastructure. Former AGL chairman Paula Rosput Reynolds said Southern haslooked to acquire AGL "over the years" and now sees a company with critical mass that makes it attractive.

"Southern has always looked at continuing to consolidate its customer base in the region," Reynolds said. "This is a great opportunity to do that."

Rosput oversaw a complete modernization of AGL's utility operation in Georgia after the state's initial move to deregulate the gas market in the late 1990s eroded the utility's profit.

"I think the primary driver is Southern wants a utility property that will enhance its earnings-per-share (EPS) growth outlook and AGL is set up for that," said Glenrock Associates analyst Paul Patterson.

"This deal brings both an immediate lift to long-term growth, new opportunities outside the utilities, a more regulated and lower risk profile," UBS analyst Julien Dumoulin-Smith said in a note. It also dilutes Southern's exposure to cost overruns at its two high-profile construction projects, the Kemper County coal-gasification plant in Mississippi and expansion of the Vogtle nuclear plant in Georgia,

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