Utility deal spurs gas-to-grid momentum
Southern Company’s pipeline footprint just got a bit bigger
A $1.5 billion deal between Southern Company and Kinder Morgan this week is one more sign of the growing importance of natural gas to electric power generation in the U.S.
Atlanta-based Southern Company, the second-largest utility company in the U.S. in terms of customer base, agreed to pay cash to Kinder Morgan for a 50% equity interest in the Southern Natural Gas (SNG) pipeline system.
The 7,600-mile network connects gas fields in Texas, Louisiana, Mississippi, Alabama and the Gulf of Mexico to the Southeast, one of the fastest-growing markets for gas used in power plants.
“They have a similar outlook on the world as we do … that nat- ural gas is the future of electric generation,” Rich Kinder, the executive chairman of Kinder Morgan, which bills itself as the biggest energy infrastructure company in North America, said in a conference call with bankers Monday.
“This just positions us much better in the most prolific natural gas usage area for electric generation, in the Southeast.”
Still, there’s more to the deal than just an opportunity to sell more gas. The transaction will enable Houston-based Kinder Morgan, a highly leveraged company with a huge debt load, to pay down those obligations.
Selling a stake in the pipeline to Southern Company is also apt to please Kinder Morgan shareholders, who saw their dividends cut by 75% in the fourth quarter of last year as slumping prices shook up the oil and gas sector.
But broadly speaking, the announcement shows again just how deeply gas is penetrating electric power markets, as record production, low prices and relatively low emissions make the fuel especially attractive for electricity production.
Southern Company, whose electric power subsidiaries operate in Alabama, Florida, Georgia and Mississippi, relied on gas for 47% of its generation in 2015, compared with 23% in 2009, and that share is likely to continue to grow.
Coal, on the other hand, accounted for 33% of Southern Company’s generation last year, down substantially from its 57% share seven years ago.
Across the U.S., the story is the same. In a report Tuesday, the U.S. Energy Information Administration estimated that electricity generation by gas increased by 6.8% in the first half of 2016, compared with one year ago. Coal-fired generation fell by 21%.
For 2016 as a whole, EIA fore- casts that gas will supply 34.3% of electricity generation; coal, 30.2%. That would mark the first time that gas becomes the fuel of choice for power plants on an annual basis.
The importance of gas to utilities isn’t limited to its value as a power plant fuel. Increasingly, electric utilities see payoffs from adding gas distribution to their business to offset flat demand in power markets.
Southern Company just completed an $8 billion acquisition of the gas distributor AGL Resources, with its 4.5 million customers stretching from New Jersey to Florida.
With the AGL Resources acquisition, Southern Company now buys nearly half of the gas shipped on the SNG pipeline.
“Our new ownership stake in SNG will position Southern Company for future growth opportunities and enhanced access to natural gas, which are expected to benefit customers and investors alike,” Thomas Fanning, Southern Company’s chairman, president and CEO, said in announcing the deal.
Both Fanning and Kinder said the move will lead to improvements in the SNG pipeline, which Kinder Morgan will still operate.
For Kinder Morgan, combining forces with Southern Company not only helps enhance the pipeline company’s balance sheet but gives it time to wait out the slump in oil and gas prices and position itself better for further expansion of its grid.
“This can make us a lot more patient and selective regarding other things we look at,” Steven Kean, president and CEO of Kinder Morgan, said in the conference call.