When AGL Resources announced its planned $2.4 billion acquisition of a huge Illinois utility last week, the Atlanta-based gas company got a level of national attention it hadn't seen in its 154 years in business.
Media from across the country clamored for interviews, taking even AGL aback. By the next day, the company’s purchase of Naperville, Ill.-based Nicor Inc. dominated the first 40 pages of AGL news on Google, and a once parochial Georgia gas company was poised to become the largest gas-only utility holding company in the United States.
The acquisition, which will nearly double AGL's size, caps a long transformation that one longtime observer said should be a case study in business schools: “It’s really been fascinating ,” said Georgia Public Service Commissioner Robert Baker, who has regulated AGL for 17 years.
During his tenure, Atlanta Gas Light changed from a conventional Georgia-regulated monopoly to a holding company with utilities in seven states and a growing portfolio of deregulated businesses across the U.S. natural gas supply chain.
The state of Georgia helped.
From the Legislature’s decision to deregulate natural gas in the 1990s to the PSC decision to give AGL acquisition incentives, state policies shaped the company’s metamorphosis.
The state of Georgia also benefits, Atlanta Gas Light President Suzanne Sitherwood said.
"The value this gives to us is scale and the efficiencies that come with that," she said. "When you get to this level of scale, you just have a great amount of efficiency."
With newly discovered sources of U.S. natural gas promising to raise the fuel's profile even further, AGL is now in "the sweet spot," Sitherwood said.
"Overnight, AGL will sell more natural gas to customers than anyone in North America," she said. "Suppliers will pay attention to us."
Atlanta Gas Light got its start in 1856 in the gas streetlight business in Atlanta, growing to become Georgia's largest gas monopoly.
It stuck its toe outside Georgia in 1988, buying a small gas company in Chattanooga. But it stayed at home after that, a garden-variety utility company with a bit of a bad boy public image, always in the shadow of its bigger -- and smoother -- utility counterpart, Georgia Power.
In the 1980s and early 1990s, Atlanta Gas Light earned a reputation for always having its hand out: In the 13 years between 1982 and 1995, the utility asked for rate increases 13 times.
“It was every March, as regular as rain, always contentious," Baker said.
The company said it needed the money because it had to keep up with Georgia's growth. But its relationship with its regulators and the public suffered.
"They had this flawed model and way of doing things," said Stan Wise, the second-longest-serving member on the commission. But in the mid-1990s, new CEOs Walt Higgins and then Paula Rosput brought “fundamental changes from the way the company operated in the 1980s and early 1990s,” Wise said.
The company began signaling larger ambitions almost immediately. In 1996, Atlanta Gas Light formed AGL Resources, the holding company that would become its vehicle for expansion.
The company also began pushing for deregulation.
It tried and failed to convince state lawmakers in 1996.
“How do I put this nicely?" Wise said. "The first time they tried, they were spinning a message that clearly wasn’t true. They wanted it to appear to be a grass-roots call for it, and it was shown that it wasn’t a grass-roots call.”
The company succeeded the next year, when the Legislature approved the most sweeping deregulation law in the country. Other states allowed competition in the natural gas business. But only Georgia required it, forcing AGL customers to choose a new gas supplier.
For AGL, the change was profound. Instead of selling and piping gas to retail customers, the regulated monopoly sold pipeline delivery service to marketers.
"They went from billing 1.3 million customers every month to billing 12 to 14 customers every month,” said Baker of the PSC. To the extent the company still billed actual consumers, it did so for marketers and for a price, he said, turning what had once been an expense item into a revenue generator.
The structure freed the company of risks that even other utility monopolies face. The company was no longer significantly exposed to changing fuel prices or weather, for instance.
The company's parent, meanwhile, moved into deregulated markets, all related to the gas business. "They stuck with their core business and the related family," Wise said. "I think that's fundamental. They know what they know."
AGL Resources formed a retail marketing arm, Georgia Natural Gas, which is now the state's biggest. It founded a Houston-based company that trades space on interstate natural pipelines. Later, with the arrival of new CEO John Somerhalder, a wholesale gas veteran, it bought underground salt domes for storing wholesale natural gas in Louisiana and Texas. And this year, it paired up with Somerhalder's former employer, El Paso Corp., to start a liquified natural gas trucking business.
AGL also bought traditional gas utilities in Virginia in 2000, and in Florida, Maryland and New Jersey in 2005.
All the while, it continued to shore up its regulated pipeline business in Georgia, which will remain its largest utility by far until the Nicor acquisition is complete.
After years of trying, it finally won a new way of funding most of its infrastructure needs last year, against strong opposition from consumer groups. The company persuaded the PSC to sign off on a pay-as-you-go surcharge to pay for projects, which shifted risk from the company to gas customers.
AGL's latest policy victory came this fall. The PSC approved a mechanism that allowed investors to keep half the savings achieved by acquisitions for 10 years, creating an incentive for acquisitions. AGL's Georgia customers, in other words, would get half the benefit of those savings for 10 years, instead of all of it.
The October ruling "provided us certainty" when evaluating acquisitions, Sitherwood said. "There is no other policy like this anywhere in the United States. Our customers will get half of the savings, and our investors will get half of the savings. I give the PSC a lot of credit."
The company announced its Nicor acquisition six weeks later.
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