Dive Brief:

• Southern Co. has announced it will purchase natural gas distribution company AGL Resources in a $12 billion deal, including a total equity value of $8 billion. 
• The deal would make Southern the nation's second-largest combined gas and electric utility by customer base, the companies claim, with 11 regulated gas and electric distribution companies serving about 9 million customers. The combined rate base for the companies would be about $50 billion.
• Southern will purchase the Atlanta-based company for $66 per share, a 38% premium over Friday's closing price. The transaction is still subject to regulatory approvals.

Dive Insight:

Pushed by the Obama administration's Clean Power Plan and historically low prices for the resource, natural gas is expected to play a much bigger role in U.S. power production in the coming decades. Electric utilities are increasingly taking notice, and some are pushing investments in gas production and transportation.

Earlier this year, Florida regulators gave the go-ahead to Florida Power & Light to invest directly in natural gas drilling operations in Oklahoma. Duke Energy has a similar request still in front of the Public Service Commission. International companies are in on the trend as well. Japan's Sumitomo and India's Gail both have deals in U.S. shale fields, and AGL itself has hinted it may invest. The idea, Utility Dive has reported, is to hedge against gas price fluctuations by owning stakes in the production companies or facilities themselves.

Since AGL is a distributor, Southern's purchase won't give it a direct stake in gas production, but it will give it a new foothold in the natural gas market. Should the transaction be approved by AGL shareholders and pass regulatory scrutiny, Southern will own more than 80,000 miles of natural gas pipelines. Those lines, while primarily used for supplying natural gas customers, could be used to help alleviate supply constraints for gas plants across Southern's service territories. Both Southern's regulated utilities and its unregulated power developer have been greatly increasing their utilization of natural gas in recent years.

“Coal is out, gas is in,” Skip Aylesworth, a manager for Hennessy Funds, told Bloomberg. “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.”

Investments in natural gas pipelines are an emerging trend among large utilities. Two major U.S. utilities — Duke and Dominion — are partnering with Piedmont Natural Gas and AGL to construct the 550 mile Atlantic Coast Pipeline, aimed at improving gas supply in the Mid-Atlantic region. Southern's purchase of AGL would give it a stake in that project as well. 

“For some time we have expressed our desire to explore opportunities to participate in natural gas infrastructure development,” Southern CEO Tom Fanning said in a statement.

AGL Resources' distribution operations include Nicor Gas in Illinois, Atlanta Gas Light in Georgia, Virginia Natural Gas in Virginia, Elizabethtown Gas in New Jersey, Florida City Gas in Florida, Chatanooga Gas in Tennessee and Elkton Gas in Maryland. The transaction is contingent upon approval by AGL shareholders, utility regulators in the affected states, and the notification and clearance requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. AGL and Southern expect to complete the transaction in the second half of 2016.