Southern Co. (SO) said Aug. 24 that it will buy AGL Resources Inc. (GAS), a company that is increasingly tapping into shale gas to supply Virginia, Georgia and Marcellus gas to New Jersey.

The boards of directors of both companies have approved a definitive merger agreement in a deal worth $8 billion in equity and an estimated $12 billion in enterprise value. As part of the agreement, Southern Co. will buy AGL for $66 per share, a 36% premium on the company’s Aug. 21 stock price.

AGL, a distributor, wholesaler and retailer, will become the third-largest operating subsidiary of Southern. The deal required shareholder approval, clearance from the Federal Trade Commission under the federal Hart-Scott-Rodino antitrust act and utility commissions in Georgia, Illinois, New Jersey, Maryland and Virginia to sign off.

AGL uses more than 1,500 billion cubic feet per year of gas for consumption and throughput volume. The company is also a retail marketer of natural gas and related services for more than 1 million customers in 24 states.

The company is constructing pipelines from the Marcellus and Utica and anticipates growing volumes moving to the Southeast, Midcontinent and Eastern Canada over time. AGL describes its Hampton Roads Crossing Pipeline as a gateway to access natural gas supplies from the Marcellus shale, Rockies, Midcontinent, Gulf Coast and other locations.

Southern clearly has its eyes on more gas infrastructure from shale plays. Southern wants to play “offense in supporting America's energy future through additional natural gas infrastructure,” said Thomas A. Fanning, Southern’s chairman, president and CEO.

"For some time we have expressed our desire to explore opportunities to participate in natural gas infrastructure development,” he said. “With AGL Resources' experienced team operating premier natural gas utilities and their investments in several major infrastructure projects, this is a natural fit for both companies.”

In its second-quarter 2015 earnings report, AGL said it is continuing to negotiate an agreement that would allow Virginia Natural Gas to invest in proven natural gas reserves in the Marcellus shale region. Should an agreement come to fruition, a plan would be filed with the Virginia State Commerce Commission in the third quarter.

In the past 18 months, AGL has committed to investments worth $670 million in three interstate pipelines. In August 2014, AGL entered into a joint venture to construct and operate a natural gas pipeline that will transport low-cost natural gas from the Marcellus Shale area to customers in New Jersey.

“We believe this will alleviate takeaway constraints in the Marcellus region and help mitigate some of the price volatility experienced during the past winter,” the company said in its 2014 annual report.

AGL also said in its 2014 annual report that advances in natural gas shale drilling have resulted in historically high supplies of natural gas and historically low prices for natural gas.

“This dynamic has provided solid cost advantages for natural gas when compared to electricity, fuel oil and propane and opportunities for growth for our businesses.” the company said. “We expect volatility to be low to moderate and locational or transportation spreads to decrease over time as new pipelines are built to reduce the bottleneck in the currently constrained shale areas of the Northeast U.S.”

Southern said the merger will better position the companies to provide necessary natural gas infrastructure to meet customers' growing energy needs, and will create the second-largest utility company in the U.S. by customer base.

Post-merger, Southern will:

  • Operate 11 electric and natural gas distribution companies serving about 9 million customers;
  • Control nearly 200,000 miles of electric transmission and distribution lines and more than 80,000 miles of gas pipelines; and
  • Generate up to 46,000 megawatts.

Southern said it is known for regularly outperforming industry peers in reliability, with prices below the national average and the highest customer satisfaction among peer utilities as measured by the Customer Value Benchmark survey.

"AGL Resources' management team and board of directors wholeheartedly support this transaction, and we believe it will provide new opportunities and enhanced value for our shareholders, customers and employees. The purchase price is reflective of the strong platform for growth that we have diligently cultivated over the past several years, and accelerates value recognition for these efforts," said AGL chairman and CEO John W. Somerhalder II.

Somerhalder also said, "Importantly, both companies are committed to safely delivering clean, reliable, affordable energy while providing customers with world-class service. The respective models of Southern Company and AGL Resources focus on the fundamental values of safety, operational excellence and environmental stewardship.

Southern Company expects the transaction to:

  • Be accretive to earnings per share (EPS) in the first full year following the close of the transaction;
  • Accelerate expected long-term EPS growth to 4-5%;
  • Preserve its strong financial profile and further support investment in the company's energy platform; and
  • Enhance the ability to increase the growth rate of its dividend, subject to board of directors' approval.

Southern Company has committed financing from Citigroup Global Markets Inc. and plans to put long-term financing in place prior to the closing of the transaction.

Citigroup Global Markets Inc. is serving as the exclusive financial advisor and Jones Day, Gibson Dunn & Crutcher LLP and Troutman Sanders LLP are serving as legal counsel to Southern Company. Goldman, Sachs & Co. is serving as the exclusive financial advisor and Cravath, Swaine & Moore LLP is serving as legal counsel to AGL Resources.

Contact the author, Darren Barbee, at dbarbee@hartenergy.com.

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