Tom Fanning Southern Company chairman (left) and AGL Resources chairman and CEO John W. Somerhalder II (right) officially announced the Southern Co. buying AGL Resources Inc. for approximately $8 billion on Monday, Aug. 24, 2015 at the Southern Company headquarters in downtown Atlanta. JOHN SPINK / JSPINK@AJC.COM

Gas deal could signal Southern’s drift from new nuclear projects

Southern invests big in gas, but is still committed to nuclear plants

Six months ago, three top executives at Georgia’s largest utility companies met over steak dinners at Bones restaurant in Atlanta to explore possibly joining some planned pipeline projects aimed at tapping the Midwest’s booming production of natural gas.

But the talk quickly stretched to a more ambitious agenda: Southern Company was interested in buying AGL Resources, the Atlanta natural gas utility that is a partner in a $5 billion project to build a 550-mile gas pipeline from North Carolina to West Virginia.

That plan, which code-named Southern “Eagle” and its target “Falcon,” after the Atlanta football team, stayed under wraps until last week. Monday, the two companies unveiled a deal for Atlanta-based Southern to acquire its neighbor for $12 billion in cash and debt.

The acquisition will make Southern the nation’s second largest utility, adding AGL’s natural gas pipelines, storage facilities and customer networks stretching from Texas to New Jersey and Illinois to Florida.

The huge deal also likely marks a turning point, some industry experts say, away from Southern’s earlier ambitions to add to its expensive nuclear and “next generation” coal plants, which have turned out to be much more difficult and costly to build than Southern expected.

This deal signals that “the nuclear renaissance is over for Southern,” said Robert “Bobby” Baker, a regulatory lawyer and former member of Georgia’s utility regulator, the Public Service Commission.

Natural gas “is so much cheaper than nuclear or coal,” he said.

A spokesman for Southern, however, said the company may build new nuclear plants in the future. “New nuclear remains important to best meeting customers’ future energy needs as part of a diverse energy mix, as evidenced by Georgia Power’s construction two new nuclear units at Plant Vogtle,” said Tim Leljedal.

The Atlanta company is building two new nuclear power units at its Vogtle site in Georgia and an advanced-technology coal-fired plant in Mississippi. Both those projects are years behind schedule and have resulted in billions of dollars of cost overruns that will be born by Southern’s shareholders or customers, or both.

Leaving coal behind

With the AGL deal, Southern will be the latest electric utility to make a big jump into natural gas, which has become much cheaper than other fuels due to the boom in U.S. oil and gas production in the Midwest and elsewhere, brought on by new hydraulic fracturing and well drilling techniques.

Company executives tout the proposed merger as a smart move to expand Southern’s operations into a new business, adding millions of customers. Also, the deal would allow Southern to capitalize on cheap natural gas to produce future power as a cleaner alternative to coal — historically Southern’s main fuel.

To meet tougher air standards, Southern and its subsidiaries such as Georgia Power have been closing coal-fired plants and converting or adding power plants that burn natural gas.

“Natural gas is such a dominant force going forward,” said Tom Fanning, Southern’s chief executive. “It’s going to be very difficult to do any [coal] plants going forward,” he said. There “may be new nuclear” projects in the future, he added, but there will “certainly” be new power plants using natural gas and renewable energy sources such as solar and wind power.

Teaming up with AGL to buy natural gas could lead to cheaper energy costs, according to Southern. Executives said they expect the AGL acquisition to quickly add to profits after it is completed next year.

“This is a growth story. This is a story where we leverage the companies’ strengths,” said Fanning.

Experts say AGL could be a big help, because it has long-term contracts with interstate pipelines, an experienced team of fuel traders, and a network of fuel terminals and big storage facilities in underground salt domes where it stores natural gas to use during its peak season in the winter.

The deal also gives Southern access to a handful of AGL’s big new pipeline projects.

Consumer benefits uncertain

But some investment analysts, industry experts and consumer advocates are skeptical about the potential pay-off and savings, saying Southern overpaid for AGL. Southern agreed to pay about $2 billion more for AGL than the company’s market value before the deal was announced — a 36 percent premium.

“It’s a great deal for AGL’s shareholders,” said Mark Barnett, a utility analyst with Morningstar. “Southern’s shareholders are probably kind of annoyed at the high price.”

The acquisition could weigh Southern down with additional debt and lower profits, investors fear.

Two bond rating agencies, Standard & Poor’s and Fitch, also both put Southern on “negative” watch for potential debt rating downgrades after the deal.

“My concern when they talked about this transaction is they didn’t detail what type of merger savings they would get,” said Christopher Muir, an equity analyst for S&P Capital IQ. Southern will have to show it can squeeze savings out of the deal, which would likely mean eliminating call center and middle management jobs, he said.

Instead, Southern said it plans to maintain AGL’s separate headquarters down the street from its own head office in downtown Atlanta. Baker, the former PSC member, said Southern doesn’t typically make big job cuts after acquisitions.

To pass on some of those costs, AGL and Southern’s subsidiaries, including Georgia Power, might seek federal and state regulators’ approval of higher rates on electricity and use of AGL’s natural gas distribution services.

“All of the customers of both firms should locate and prepare their wallets for intensified extractions by the happy couple,” said Neill Herring, a lobbyist for the Sierra Club.

In some states, utility regulators have allowed utilities to roll all or part of the cost of their acquisitions into customer rates. In others, regulators have blocked the deals or rejected requests to bump up rates unless the companies can make a strong case that it benefits consumers.

The Southern-AGL deal comes on the heels of the scuttled attempt last week by Chicago-based Exelon to buy Washington, D.C.-based Pepco Holdings Inc. for $6.8 billion. The D.C. Public Service Commission on Tuesday rejected the acquisition, saying it would not benefit customers.

In contrast, the five members on Georgia’s Public Service Commission have already said their initial impressions of the Southern-AGL deal are favorable.

“That’s unusual,” said Muir, the Standard & Poor’s analyst. “If I were a regulator, my job is to fight for the customer and the utility. You have to balance that.”

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