Marriage proposal: The two companies at a glance
Southern Co.
Employees: More than 10,000
Annual revenue: $18.47 billion
Main business: Parent of several southeast electric utilities including Georgia Power
AGL Resources
Employees: More than 5,000
Annual revenue: $5.63 billion
Main business: Natural gas distribution
Southern Co. is beginning a months-long process to get state and federal regulators’ blessings for its $8 billion deal to buy natural gas provider AGL Resources in a marriage of two Atlanta corporate giants.
Regulators from up to three federal agencies and seven state utility commissions, including the Georgia Public Services Commission, will look at the proposed merger to create the nation’s second-largest utility. The combined companies would serve about 9 million customers in nine states.
Regulators will focus on often conflicting goals: ensuring that the resulting electric and natural gas utility is financially healthy, but also that the merged companies don’t harm consumers or competitors through unfair prices or practices. They’ll want to know what the merger will cost, and whether customers will be harmed or helped.
Often, the process turns into a tug of war between power companies and regulators over whether shareholders or customers benefit from millions of dollars of annual cost savings from closing redundant call centers and other operations and firing workers who are no longer needed.
Partly because of the lengthy reviews, Southern’s deal isn’t expected to be completed until the second half of next year.
The Georgia PSC later this fall is expected to set its schedule of hearings on the acquisition. The agency is unlikely to block the merger, according to industry watchers, but it could set conditions to protect against potential market abuses or to ensure that customers reap some of the benefits.
Power deal
Meanwhile, AGL shareholders and executives stand to reap huge benefits.
AGL’s top six executives could receive more than $40.1 million in pay-outs, especially if they lose their jobs within two years after the deal closes.
AGL Resources CEO John Somerhalder II’s exit package would be almost $16.9 million, according to AGL’s disclosure filings.
The top executives will get cash payments for their stock options and restricted stock immediately after the closing of the merger.
Also, if the executives lose their jobs within two years of the merger, they can get severance packages of at least double their salary and bonus, plus the right to cash out any remaining stock awards and receive continuing health insurance, among other benefits.
To buy AGL, Southern offered shareholders a premium of more than 30 percent over the pre-deal share price.
Southern said the deal will enable it to branch beyond the slower growing electricity industry into natural gas distribution, which has benefited from falling fuel prices. The deal would add AGL’s natural gas pipelines, storage facilities and customer networks stretching from Texas to New Jersey and Illinois to Florida.
Customers’ shift to more efficient lights, appliances and more advanced power-saving technologies has meant that “a lot of the electrics are starting to see their sales volumes drop,” said William Kemp, with Chicago utility consulting firm Enovation Partners. “They’re looking for other ways to grow.”
But the deal also makes a huge, complex company bigger and more complicated. The concentration of market power worries consumer advocates who fear customers could ultimately pay higher rates.
Cost-shifting
The merger also hands regulators a more difficult job of making sure Southern doesn’t unfairly shift costs at the expense of some of its regulated utilities’ customers, a practice known as “cross-subsidization.”
Southern operates several state-regulated electric utilities, including Georgia Power. AGL Resources operates state-regulated natural gas distributors in several states, including Atlanta Gas Light in Georgia and an equally large unit, Nicor Gas, in Illinois. Southern and AGL also own unregulated businesses.
Under federal antitrust law, the Federal Trade Commission or Department of Justice review all proposed mergers, including this one, for potentially harmful effects on the marketplace. But state utility commissions usually play a bigger role in scrutinizing utility mergers.
The Federal Energy Regulatory Commission also is charged with reviewing proposed utility mergers to make sure the parent company doesn’t use one unit to subsidize another.
But the U.S. Government Accountability Office in 2008 said FERC had done little to beef up its review process, and that FERC couldn’t assure that mergers weren’t resulting in cross-subsidization.
Bobby Baker, a utilities lawyer and former Georgia PSC commissioner, said he worries Southern and AGL will be able to put other natural gas marketers in Georgia at a disadvantage. Georgia Power and Atlanta Gas Light might offer package discounts for electricity and natural gas, he said. Or Southern might charge competitors much higher prices for the two utilities’ customer lists or other services than it charges its subsidiaries.
“We want to maintain the competitive natural gas marketplace we have,” he said. “The commissioners need to take a thoughtful look at this.”
Georgia PSC officials said the agency already reviews dealings between various units of Georgia Power, Atlanta Gas Light and their parent companies to make sure no harmful cost-shifting or unfair pricing is taking place. Such protections also will be a focus of the the PSC’s review of the Southern/AGL merger, PSC officials said.
Spreading the benefits
When companies announce mergers, executives usually like to talk about cost-savings they expect by closing redundant headquarters and streamlining duplicate functions.
So far, Southern is downplaying such “synergies.” A company spokesman said the deal “was not driven by the ability to achieve synergies” but by potential growth in natural gas utility industry. Southern said it plans to keep AGL’s headquarters, which is near its headquarters and Georgia Power’s headquarters, all in Midtown Atlanta.
“We’re not really prepared to talk about synergies just yet,” Southern CEO Thomas Fanning said in response to one of several questions industry analysts and reporters asked on the day in late August the deal was announced.
Here, maybe, is why: Often, as a condition to merger approval, state regulators try to claim all or a portion of those savings to benefit the utilities’ customers through lower rates. Utilities argue their shareholders deserve the biggest share.
“There will certainly be discussions of the synergies of the case,” said Tom Bond, the Georgia PSC’s director of utilities. But he said it’s too early in Southern’s case to know how much those cost savings might be.
Companies tend to low-ball estimates of the potential synergies when they announce the deals, experts said. In a 2011 study of more than two dozen utility mergers, Kemp, with Enovation, found that the savings utilities achieved three years after their mergers were often twice what they had initially announced to regulators and the public.
The typical amount of the actual cost savings, according to his study, were roughly 5 percent of combined pre-merger operating expenses. In Southern’s and AGL’s case, their combined operating expenses were $19.1 billion last year, suggesting potential savings of nearly $1 billion a year if that 5 percent figure holds.
One-time cut
Cost savings for ratepayers is usually lower.
In 2005, North Carolina-based Duke Energy announced a $9 billion deal to buy Cinergy Corp., an Ohio electric and natural gas utility. As a condition for approval, the North Carolina Utilities Commission demanded a one-time rate cut of nearly $118 million to share expected merger savings with customers.
The regulator also ordered Duke to pass on cost savings resulting from its bigger fuel purchases. And, mindful that state regulators in Kentucky, Ohio and South Carolina were also scrutinizing the deal, North Carolina demanded a “most favored nation” clause requiring Duke to match any better deals other state regulators got.
In Georgia, just months before its $8.6 billion deal to buy Illinois gas distributor Nicor Gas in 2010, AGL asked the PSC to allow it to split costs savings from future mergers 50-50 between its shareholders and its customers. Previously, merger savings indirectly benefited customers rather than shareholders.
The PSC agreed, allowing the company to keep half of the cost savings from future mergers for 10 years.
“The Commission finds that it is appropriate to adopt a policy to encourage prudent acquisitions,” the regulator said.
The PSC’s decision means the company and customers are now splitting $10.9 million in annual savings from the Nicor merger for 10 years. Customers get their share as a credit on monthly bills.
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