US utility Southern to buy gas distributor AGL Resources for $8 billion

By JIM POLSON
Bloomberg

Southern Co., the third-largest US utility owner, agreed to buy natural-gas distributor AGL Resources Inc. for $8 billion in cash to capitalize on growing demand for the heating and power plant fuel.

AGL Resources’ shareholders will receive $66 for each share they own, the Atlanta-based companies said in a joint statement Monday. That represents a 38% premium to the Aug. 21 closing price.

The transaction is the largest on record for Southern, which has been increasing gas use over coal to supply its 4.5 million electricity customers in four southeastern states. Southern joins utilities including NextEra Energy, Eversource Energy and DTE Energy that have formed ventures to build pipelines as growth in power slows and a glut of cheap gas boosts volumes for distributors.

“Coal is out, gas is in,” said Skip Aylesworth, a Boston-based manager for Hennessy Funds. “If I’m going to convert my power plants to gas to survive as a utility, I want to control the infrastructure to get it to me.”

Hennessy funds run by Aylesworth have $2 billion under management, including shares of AGL.

‘Growth Play’

“We really consider this to be a growth play,” Southern CEO Tom Fanning said Monday. “Expanding into natural gas infrastructure further is absolutely something we want to do.”

Southern owns electric utilities in Georgia, Alabama, Florida and Mississippi and is one of the nation’s largest power generators, according to data compiled by Bloomberg. AGL owns gas utilities with 4.5 million customers in seven states.

The deal is expected to close in the second half of 2016, subject to approval of shareholders of AGL as well as state and federal regulators, the companies said. The transaction will increase Southern’s earnings per share the first year after closing.

AGL rose 26% to $60.50 at 9:47 a.m. in New York, the biggest intraday gain in more than 30 years. Southern fell 3.2% to $44.33. It has fallen 9.7% this year.

Slower Sales

“The addition of AGL Resources to our business will better position Southern Co. to play offense supporting America’s energy future through additional natural gas infrastructure,” Fanning said in the statement. “For some time we have expressed the desire to explore opportunities to participate in natural gas infrastructure development.”

Electric utilities like Southern have reported slower growth in sales amid energy conservation as demand for gas has risen. Southern’s power sales volumes have gained an average of 1.2% annually over the past five years, according to company data compiled by Bloomberg. Gas revenue at AGL climbed 37% since 2011, when it acquired Nicor, another distributor.

The acquisition would give Southern a 5% stake in the $5 billion Atlantic Coast Pipeline under development by electric utility owners Dominion Resources and Duke Energy. The line would deliver fuel from the largest US gas field, the Marcellus Shale, to eastern Virginia and North Carolina.

Citigroup was Southern Co.’s financial adviser. Goldman Sachs Group advised AGL.

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