M&A Announcement

Aug 24, 2015

Good day. My name is Demetra, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Southern Company conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. As a reminder, this conference is being recorded Monday, August 24, 2015. I would now like to turn the call over to Mr. Dan Tucker, Vice President of Investor Relations and Financial Planning. Please go ahead, sir. Thank you, Demetra. Good morning, everyone, thank you for joining us on such short notice today. Earlier this morning, Southern Company announced the definitive agreement to purchase AGL Resources in an all-cash transaction. Joining me today to discuss this transaction are Tom Fanning, Chairman, Chief Executive Officer, and President of Southern Company, Art Beattie, CFO. Also joining us is John Somerhalder, Chairman and CEO of AGL Resources, as well as Drew Evans, President and Chief Operating Officer, Sarah Stachacz, Director of Investor Relations. Welcome to all of you. In just a moment, Tom will provide an overview of the transaction as well as the strategic rationale underpinning our board's decision to approve this acquisition. Since many of you are not as familiar with AGL Resources as you are Southern Company, John will provide a brief overview of that business, followed by Art, who will provide you with an overview of the pro forma combined company. After closing remarks, we will take your questions. Before we get started, let me remind you that we will make forward-looking statements today in addition to providing historical information. Various important factors could cause actual results to differ materially from those indicated in the forward-looking statements, including those discussed in each of Southern Company's and AGL Resources' Form 10-K and subsequent filings, including the Form 8-K filed this morning to announce the transaction. The slides we will discuss on today's call may be viewed on our investor relations website at investor.southerncompany.com. At this time, I'll turn the call over to Tom Fanning. Thank you, Dan. We are very excited to be making this announcement today. As you can see from our press release this morning, this transaction has tremendous expected benefits for our shareholders, including increases in our expected growth rates for EPS and, subject to board approval, dividends, as well as persuasive industrial logic that should position these two companies for great long-term success. The evolution of natural gas in the U.S. has been a topic of much discussion in recent years, largely driven by an abundance of low-cost natural gas. Southern Company has significantly increased its own electricity production from natural gas over the last several years, something we were better positioned to do than most, all for the benefit of our customers. Going forward, the future of natural gas is expected to be influenced by continued low natural gas prices, federal environmental regulations, and customers who will have more and more options when it comes to energy consumption. We believe that the acquisition of AGL Resources better positions Southern Company to succeed in that future, particularly a future in which there is a need for more gas infrastructure, something I have talked about for years. The slide provides a brief overview of this transaction. Southern Company has agreed to acquire each outstanding share of AGL Resources for $66 in cash. At closing, AGL Resources will become the third-largest operating subsidiary of Southern Company and will operate alongside Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power. Similar to Southern Company's other traditional operating companies, we will maintain an external board of directors for AGL Resources to provide additional oversight and guidance to the business going forward. As a result of this transaction, we expect to issue a combination of debt and equity. A portion of the equity will be issued prior to closing, with the remainder issued over time through 2019. Credit quality has always been a priority for Southern Company, and that focus remains unchanged with this transaction. We believe this preserves the financial integrity necessary to fund our existing business, including Southern Power. It should also position us well to continue our pursuit of other value-accretive investments, including additional gas infrastructure. We anticipate closing the acquisition in the second half of 2016, subject to the customary approvals, including several state, utility, and other regulatory commissions, and a federal Hart-Scott-Rodino review. Slide six details the key approvals, including the states in which we will need the approval of the state utility regulators. Let's now turn to the strategic rationale for this combination. First and foremost, AGL Resources is a company very akin to Southern Company when it comes to its customer-focused business model. Both companies have a track record of successfully delivering clean, safe, reliable, and affordable energy for customers. This has certainly been Southern Company's DNA for decades, and the addition of AGL Resources to the Southern Company family will expand the markets and customer base to which Southern Company applies that proven business model. With this acquisition, Southern Company's traditional utility subsidiaries are projected to have approximately nine million utility customers, the second-largest total in the U.S. Secondly, as a critical element of our ongoing financial policy, value is a function of risk and return. Much like Southern Company, the vast majority of AGL Resources' earnings and cash flows come from strong regulated utility subsidiaries. We see great value in the predictability and increased scale that AGL Resources brings to our regulated earnings profile. Beyond the natural fit inherent in two highly complementary businesses, we also believe strongly that now is the right time for this transaction. We foresee an emerging convergence of technology, consumer behavior, market forces, and regulatory changes which, over time, will change the way customers use energy. We've been talking for some time now about the necessity for an expansion of natural gas infrastructure. We expect natural gas use in the U.S. will increase in the future. Supply is abundant. Prices are low. The dramatic increase in natural gas used for electric generation is a prime example. On a standalone basis, Southern Company's use of natural gas is projected to increase to 1.8 BCF per day in 2015, a 20% increase over the past three years. Our natural gas usage has nearly doubled in the last 10 years, and by 2020, this number could grow to as much as 2.2 BCF per day. The throughput on the AGL Resources system currently averages over two BCF per day. Additionally, AGL Resources' retail energy business purchases significant amounts of natural gas for its end-use customers. Combined, our use of natural gas would grow to well over four BCF per day, making Southern Company the most important consumer of natural gas in the U.S. The long-term outlook would indicate that even more natural gas will be needed when you consider sustained low natural gas prices, a growing U.S. economy, LNG export facilities, and the potential impact of federal environmental regulations. However, despite what many believe to be centuries' worth of cheap natural gas supply, sufficient infrastructure does not currently exist in all regions to accommodate the anticipated growth. Southern Company has been exploring opportunities to participate in new natural gas infrastructure for some time. AGL Resources, at a modest scale, is already a participant in several major projects and has an experienced midstream management team. We expect the combined company will be able to compete for more and larger opportunities in the future and to further increase supply. Finally, a point about how customers use energy. It has been our argument for some time now that energy efficiency is not about using less. Rather, it is about using energy more wisely. We have begun to refer to this as energy productivity. We believe this strategic transaction increases our opportunity to compete in providing critical energy offerings. Not only do we expect our long-term customer-focused business model to be enhanced, but the addition of AGL Resources is also expected to provide Southern Company with a unique platform for long-term success and growth across the energy value chain. Now, before I turn the call over to John Somerhalder of AGL Resources to give a brief overview of that business, let me first say thank you to him and the entire team at AGL Resources. The last several weeks have demonstrated to us what we have already believed, that the AGL Resources team is a world-class organization, and that they have built a great company poised for even greater success long term. I look forward to the outstanding future between these two companies. John, take over. Thanks, Tom. I am honored to be here as part of this announcement. We could not have asked for a better company or a better management team to have been working with throughout the process that led to us reaching this agreement. Obviously, this transaction and the premium embedded in the price is providing tremendous value to the AGL Resources shareholders. As a management team, we are very excited to become part of the larger energy platform that you described in your remarks, Tom. Additionally, AGL Resources and Southern Company have long been two leading corporate citizens, and each has served their respective communities, including those outside of Georgia, extremely well. We look forward to the combined company continuing that tradition going forward. Now for a brief overview of AGL Resources. As Tom mentioned, AGL Resources is a largely regulated company. Over 70% of our earnings come from our regulated gas distribution companies. In order of rate base size, we serve seven regulated jurisdictions in Georgia, Illinois, Virginia, New Jersey, Florida, Tennessee, and Maryland. This distribution business serves a total of 4.5 million customers, and the two largest customer bases at Nicor and Atlanta Gas Light serve 2.5 million and 1.6 million customers respectively. AGL Resources also has an established and growing midstream business. This business includes gas storage and LNG facilities, as well as pipelines. AGL Resources is active in at least three major pipeline development projects, Dalton Pipeline, PennEast Pipeline, and the Atlantic Coast Pipeline. Our investment in these projects, all of which are more than 90% contracted, is expected to total over $650 million. Additionally, AGL Resources has retail energy and services businesses serving over 1.4 million customers across the Eastern United States. The retail energy business, which serves over 700,000 customers, is part of a longstanding successful partnership named SouthStar, of which AGL Resources owns 85%. This business operates in 11 states, including those served by our regulated operations, both on the Southern Company side and on the AGL side, plus the Carolinas and Ohio. Overall, AGL Resources expects to make over $5 billion in capital investments over the next five years, 95% of which are dedicated to the regulated utilities or contracted pipeline projects. Our financial plan, much like that of Southern Company, is bolstered by the fact that we operate in constructive regulatory jurisdictions. As a result, a large portion of the regulated investments and growth in our plan is attributed to infrastructure and pipeline replacement riders. Factoring in the combination of retail margins, strong risk management practices, and a healthy balance sheet, we believe the AGL Resources financial plan provides for tremendous value creation. Our management team and the board of directors wholeheartedly support this transaction, and we believe it will provide new opportunities and enhance value for our shareholders, customers, and employees. Investors can learn more about AGL Resources by visiting our investor relations website at ir.aglr.com. I'll now turn the call over to Art to discuss the pro forma outlook for the combined companies. Thank you, John. As Tom mentioned, this transaction is a game changer for Southern Company. At approximately 1,500 Bcf annually, not only is the combined natural gas deployment of these two companies significant, but we are also gaining substantial scale. Total state-regulated utility rate base for the combined companies will increase to over $50 billion. Regulated utility customers are expected to total approximately nine million, split about evenly between electric and natural gas. This is an $8 billion cash transaction. As a result of this transaction, we expect to issue a mix of both debt and equity. Southern Company remains committed to a high level of financial integrity, and credit ratings are very important to us. We intend to utilize equity plans that we have used in the past or potentially other sources of equity over time to target credit metrics supportive of our current ratings by 2019, the third full year after the expected closing date. We expect to begin our equity issuances later this year and to continuing issuing equity through 2019, targeting a cumulative total of $3 billion. As Tom mentioned earlier, we believe this plan preserves our ability to invest in additional value-accretive opportunities as they arise. This transaction is expected to be accretive to Southern Company's ongoing EPS in the first full year after closing and accretive to our long-term EPS growth rate. Our new long-term EPS growth rate, as measured from the 2015 EPS guidance range of $2.76-$2.88 that was provided this past February, is expected to be 4%-5%. While dividend decisions are the purview of our board of directors, the increased EPS growth rate is expected to provide opportunities to increase our dividend growth rate relative to the current projected increases of $0.07 per share per year. I'll now turn the call back over to Tom for his closing remarks. Thanks, Art. Earlier this year, Southern Company published its 2014 annual report to shareholders with a cover title that read, "Doing Energy Better." Inside the report, we described ways in which Southern Company was making energy better and moving energy better so that customers could use energy better. We truly believe that this transaction makes for an even stronger embodiment of that theme and that our customers, communities, employees, and shareholders will all benefit from the combination of these two great companies. We are now ready to take your questions. Operator, we'll now take the first question. Thank you, ladies and gentlemen. If you'd like to register a question, please press the one followed by the four on your telephone. You will hear a speed tone prompt to acknowledge your request. If your question has been answered and you'd like to withdraw your registration, please press the one followed by the three. If you're using a speakerphone, please lift your handset before entering your request. One moment please for the first question. Our first question comes from the line of Dan Eggers with Credit Suisse. Please go ahead. Hey, Dan. How are you? Hey, good morning, guys. Just a couple of questions, I guess. Number one, from a financing perspective, Art, this $3 billion of equity would be layered out ratably 2015, 2016, 2017, and 2018, 2019. We're dividing $3 billion by four and a half, and you'll get to what you guys are thinking about? Yeah, Dan, I think you're thinking about it right. We're going to look at other options and opportunities, as far as our plan right now, that's what we'd do. We will begin doing a DRIP program, which we have done in the past, probably beginning early next year. Otherwise, we'll depend on our dividend reinvestment and our employee savings programs to fund that additional equity. Okay, I guess just from a credit metrics perspective, can you walk through how low you guys think you can go and maintain kind of the A rating and then what you need to target by 2019 to get it back to just recalibrate our numbers? Yeah. We'll issue some debt largely to fund the purchase transaction upfront. Our commitment and our discussions with the rating agencies basically outlined a financing plan that would get us back to a consistent metric and a risk profile that we believe is stronger combined by the 2019 timeframe. Okay, what kind of debt service debt should we be kind of layering into our expectations or if that's the right number we should be focused on? Well, the numbers are generally in the range of where we are today in terms of just the metrics. We also have to pay attention to the qualitative risks around this. When we look at AGL, we see a more diversified, regulated business that becomes a larger Southern Company platform with larger scale. We think that weighs heavily on the risk analysis associated with our securities going forward. Does that mean you think you're going to have one of these credit column jumps to a better position with AGL lowering your risk, kind of like what maybe Exelon did with Pepco and that sort of step-up? Is it that much of a move? I'm not familiar with what Exelon did with Pepco, what I've outlined is basically where we're headed. Okay. Very good. Thank you, guys. You bet. Thanks, Dan. Our next question comes from the line of Brian Chin with Bank of America Merrill Lynch. Please go ahead with your question. Hey, Brian. Hi, good morning. Good morning. On the comments about your equity issuance, and you mentioned other sources of equity. Was that in reference to the DRIP plans or would you consider looking at other sources of equity like convertibles or some other metrics? Yeah, like a mandatory convert or something like that. Okay. We think on this deal we can do DRIP and our regular old plans and satisfy all our equity needs by 2019. Should we think about that mandatory as being done in one piece, then the rest of it is ratable, or can you give a little more clarity there? If I was going to model it, Brian, I would do it with kind of our plans operating. As Art said, we'll turn those on the end of the year or so at about $400 million a year with the balancing DRIP. Yep. Okay, great. I'm sorry if I missed this in your prepared comments, but that 4%-5% EPS CAGR, that was off of a base year of which year and which number? Current guidance. Current guidance. Okay, lastly, with regards to debt issuance, you said that there would be debt issuance upfront. Is that something that we should be thinking about upon close of the deal, or can you give us just a better sense of timing on that? It will be sometime probably. It depends on the closing date of the transaction, but sometime second quarter, early third quarter of next year. Great. Thank you very much. Yes, sir. You bet. Thank you. Our next question comes from the line of Steven Fleishman with Wolfe Research. Please go ahead. Hello, Steve. Yeah. Hey, good morning, Tom. You guys have always talked about EVA and such when you've looked at acquisitions and investments, and it's been decades where you haven't really done kind of a utility-ish oriented deal like this. I'm curious kind of how you're seeing the EVA work well on this versus things not really working well for a decade or two before this. Yeah, piece of cake. You know that we've evaluated these kinds of opportunities as an ongoing matter. We've talked a lot about that. It was interesting how this developed. John and I were actually having a dinner one night and we were just talking. I was seeking his advice, frankly, on some natural gas infrastructure opportunities we had in front of us. In the course of the discussion, we started noting kind of the joint interest of both companies. That's really where this conversation started. When we got into kind of tearing apart the financials of AGL Resources, one of the things that we were struck by was that this is a company that already had a terrific level of financial integrity and could speak to its own earnings per share growth rate of between 6% and 9%, largely through already approved riders that were associated with natural gas pipelines replacement programs. We started looking at that, and we said, "You know what? On a risk-adjusted basis, we think AGL is undervalued." That really started kind of a deep interest. When you consider kind of the position of increasing our long-term growth rate and increasing our ability, assuming the board goes with us, to increase the rate of growth of dividends It's pretty easy to see that this deal accretes to Southern Company value in a very compelling way. Recall, EVA is all about risk and return. We believe the increased returns and the increased benefits to our dividend policy on a risk-adjusted basis looks very sure to us. Okay. Going forward, this makes perfect sense. Okay. I don't know AGL's unregulated businesses very well. Could you just maybe give us a little more color on the nature of those? Is your plan to continue to keep and expand those, or are you planning to de-risk them? Maybe just a little more color there. I'll turn this over to the AGL guys. Right now they are spoken, I think your earnings are 70% associated with regulated businesses. Probably with the advent of the pipelines being developed by 2019, it goes to 80%. That's correct, Tom. The vast majority of the remaining 20% is tied up in the Georgia retail natural gas program. John, you want to? That's correct. As Tom said, a little over 70% now just regulated gas distribution with the pipeline investments between gas distribution, with the investments largely with rider surcharge programs, then the pipelines that largely fully contracted, that'll move to 80%. As Tom said, the majority of the remaining of our business is the retail business, an established market here in Georgia, where we have about 500,000 customers and then additional customers up in Illinois and in a number of other states as well, and then retail services. Those are businesses that have performed well over the last decade or so. We see stability in those businesses as well, even though those are outside of our regulated businesses. That makes up the majority of our earnings. Okay. Then just finally, just clarity on, maybe not on the metrics, but with your discussions with the rating agencies, is your sense that they will keep your ratings on current as they are based on this, or? Well, what I've said is about 2019, we expect to be back in the same range of metrics and frankly, a little bit better position from a qualitative perspective from risk. At stake here is our commitment to issue the equity over time. I can't speak for them, but back when we spun Mirant back in 2000, we made commitments to issue equity. I think our equity ratio is in the low to mid-30s, we certainly made good on our promises there. Part of our goodwill around this is issuing equity starting late this year through our internal programs. Okay. Thank you very much. You bet. Thank you. Our next question comes from the line of Shahriar Pourreza with Guggenheim Partners. Please go ahead. Good morning. Art, in your prepared remarks, I think I appreciate the additional guidance on the equity, but you did mention to assess additional creative opportunities as they arise. Are you thinking additional like M&A deals, or can you just elaborate on that? Well, I think Tom mentioned other opportunities in gas infrastructure. Beyond that, we chatted about that a little bit on earnings calls, that's the general comment, general nature of that. Yeah. If I can give you a little more flavor. I think what we said on our July earnings call is that on a number of fronts, our growth aspirations really exceed our plans so far. When you think about Southern Power right now, I think really because of our historical kind of conservative tax position, we find tremendous opportunities and we're exceeding our plans and being able to continue to feed a growth program, particularly in solar, a little bit in wind. That will continue. Certainly, we believe for the next year or so. When you think about kind of the Clean Power Plan, we've always viewed that in terms of more infrastructure development, moving probably away from coal and building more generation to supplant that. To the extent you add more renewables, you will require just rule of thumb, megawatt per megawatt base backup generation in order to support the intermittent generation that is largely spoken for with wind and solar resources. We think all of that makes sense. Now, as we continue to add more gas, either on its own to replace coal or in association with more renewables, we know that we need, and I've been very consistent about talking about this, more gas infrastructure. In fact, as I mentioned before, how John and I started talking about all this was in considering potential other gas infrastructure opportunities. Those opportunities certainly remain, and I think with the addition of the deep institutional talent that AGL has, we certainly look forward to pursuing those opportunities. When I think about adding AGL Resources to the Southern Company family of companies, we view this clearly as a growth platform, we look forward to executing on that growth. Maybe more to come. Got it. Just on AGL's midstream assets, does today's transaction cause you to reassess the size or the scalability of Southern Power relative to the comments that came out of the Q2 call? Yeah. If you're referring to the comments, someone asked, I think, how big Southern Power could be without impacting credit, I think was the question. We said it could double. I think it could double or now a little bit better. If you just do the math, it could certainly grow a good bit. We've got lots of headroom for Southern Power to grow. We look forward to executing on that. We've started talking about deals now beyond kind of the 2015, 2016 timeframe into 2017 and beyond for the rest of this decade. I think there's a very bright future there. Got it. Just lastly, the state filings, when we should expect that process to begin? Probably in the next 30 to 45 days. Excellent. Well, congrats on the transaction. Thank you. Appreciate it. Our next question comes from the line of Stephen Byrd with Morgan Stanley. Please go ahead. Stephen, how are you? Hi, good morning. Very well. Thank you very much. Thanks for taking my questions. Yeah. I wanted to just explore the gas infrastructure opportunity a little bit further. Obviously, both companies are going to need significant amounts of infrastructure. Could you just talk a little bit more, give a little more color in terms of how we could think about how should we see that procurement effort unfold? One example would be, are there ways to actively coordinate on an overall basis? Does this lead to near-term changes in terms of procurement needs, or is this more of a long-term vision? I just wanted to better understand that. Let's target this. It should parallel, I think, our increase in demand that we've outlined so far. We should think about just on normal basis, adding pipeline infrastructure to support us for the rest of the decade. As I mentioned before, between power plant and a variety of other things, we certainly have the ability to increase that into the early 2020s. Likewise, I know AGL has been thinking about some plans kind of in the upper Midwest across into Illinois. There's lots of opportunities there as well. Look, I think there are plenty of pipeline opportunities for us to pursue, and now it's even more important. Ultimately, these are things that I think will get tremendous traction. We become even in a better position to think about how to develop that infrastructure. Recall, we need this infrastructure all to serve our customers. When we think about the nation's energy future, we need more infrastructure. We're now in a position with the combined talents of these two companies to be even more aggressive in doing that. Understood. It sounds like it's fair to say that given your combined gas needs, that there could be ways that you could aggregate that more efficiently, serve that need, et cetera, and that can lead to just more spending over time. No question. Marry that with renewables and everything else. Providing that kind of infrastructure is just really important. Understood. I just wanted to shift back to the unregulated businesses, back to Steven's question, just follow up a little bit on it. In terms of how you think about the integration of that business with Southern Company overall, in terms of whether that be any synergy opportunity or on the positive side in terms of how that integrates. Also on the risk side, how do you think about the risks of that business? Are you comfortable with the risk level that it's at today? Is this something we should expect to stay about the same size it is now, or can you just give a little more color on that business as well, please? Well, first of all, when I look at the Sequent business line largely of AGL, it's been a real good performer for them. About half of Sequent, just in round numbers, serves their regulated business in order to provide hedging and a variety of useful activities. Sequent's a reasonably small business, and I know the way that AGL has talked about it is to assume a relatively low contribution in its ongoing financials, roughly a $50 million economic value every year. When you consider the size of that value to Southern, it's even smaller. When I think about the value of Sequent going forward, there certainly are some hedging opportunities. You know that we have resisted merchant businesses. As I mentioned in Steven's question before, we always evaluate everything on a risk-adjusted basis. We are an EVA shop. That's why we think this value here is so compelling. Everything that we've told you so far includes no acknowledgment of any operational synergies nor any upside potential. Really, the financials that we have suggested to you today are a combination of the base plans of both companies. We think there's a bright future ahead. We'll evaluate all business lines on a risk-adjusted basis, and to the extent there's any element of risk that is disproportionate, we'll adjust accordingly. Great. Thank you very much. Thank you, sir. Our next question comes from the line of Julien Dumoulin-Smith with UBS. Please go ahead with your question. Julien, how are you? Not too bad, thank you. Congrats on the deal. Thank you, sir. Thanks. A few cleanup items here. First, with regards to the dividend, and obviously this ties back to the equity needs. You've previously articulated kind of a steady $0.07 per annum growth rate. It seems as if you've deviated from that in your comments on the call. What is the expectation? Particularly, what's the cadence of growth as you think about your equity needs and those being ratable through the period? Sure. I don't want to speak for the board. This is ultimately a board call. Okay? Let's be very clear. If you just look at the growth rate, if you look at our dividend payout ratio, everybody knows the math. If we want to keep the payout ratio constant, the rate of growth of earnings must equal the rate of growth of dividends per share. As we go into the 4%-5% range now, which we believe is absolutely certain, taking into account no operational synergies, no upsides, no further growth plans, then we think we can grow dividends at a similar rate. If you just kind of do simple math, that would suggest we could move the $0.07 rate to maybe an $0.08 rate, something like that. We'll assess all that at the right time. Got it. Just to be clear, with regards to the equity and the credit implications, would you actually shift rating during this interim period? Is it your expectation and discussions with the agencies that you would target equity issuances in order to maintain your current ratio or at least your current rating? At least our past practice has been, we have some history with the rating agencies, that when we make a commitment, we follow through on that commitment, and they stay with us. That's exactly what we intend to do right now. Got it. Excellent. Then a last cleanup item. You discussed at length here the opportunities around gas infrastructure. Can you elaborate a little bit around the regional focus? Obviously, you talk about, or you historically talked about the Southeast as the opportunity set for your utilities. How wide reaching could these ambitions be? Are we talking about explicit midstream infrastructure, as in pipelines and deals like we've seen with Dominion and DM of late? Then perhaps to complement that, to what extent would there be palatability for gas reserves and rate base, and is that another angle for approaching the subject? Absolutely. Gas is part of rate base. I know you're considering that in Florida. Considering some opportunities from Marcellus into Illinois. Considering this intrastate deal in Georgia. Part ownership of the Dominion pipe, in Virginia. That's correct. This is John Sommer. We have nice opportunities, as Tom's talked about. Everything from projects that we already have long-term contracts for going into New Jersey, into Virginia, and even a smaller project back into Georgia, working with Williams. It's the Dalton project on the Transco system. We'll have additional opportunities, we believe, in places like Illinois. We've talked about what those opportunities may mean over time. Working together, it really enhances our position in the Southeast. Just like we recently had success with legislation in Virginia to be able to invest in reserves to protect our customers from prices long-term and make sure gas is available to them long-term, we'll look at that in other areas as we move forward too. We have all of those opportunities to invest. I'll just add also, I think I've talked about this on prior earnings calls. When I think about the many opportunities that people are asking us to consider now, given our attractiveness as an anchor tenant, that's the kind of way we like to do business. I think I've talked about the opportunities coming out of the West, really kind of Henry Hub-centered gas supply opportunities relative to Marcellus-centered opportunities. Certainly, the addition of AGL gives us a lot more institutional knowledge, deeper bench skill set, and a broader reach in which to take advantage of value-enhancing activities. I think all these things are really exciting. In the past, we've been able to put forth placeholders for Southern Power, and we've done that, and we've exceeded every goal I think we've set there. We have yet to put placeholders in place for any natural gas infrastructure, beyond this acquisition. Certainly, we see lots of exciting opportunities there. Just not ready to put a number on it yet. Got it. Excellent. Then just to be very clear about this before, your intention is to keep the credit rating as it stands? Yes, sir. Yes. Okay, great. Thanks again for all that. Thank you, sir. Our next question comes from the line of Paul Ridzon with KeyBanc. Please go ahead. Hey, Paul. How are you? I'm well, Tom. Congratulations. I really like the idea of kind of deepening and spreading your roots across the energy platform. Thank you, sir. A lot of growth opportunity there. These are great guys to do business with, I'll tell you. Just a couple of questions. You didn't talk about any breakup fees, you didn't really dive into potential synergies as far as consolidating back office or any billing or maybe any truck roll opportunities. Just kind of talk about how you're thinking about synergies. Well, we're not really prepared to talk about synergies just yet. I just want to repeat everything that we are putting forth in terms of accretive in the first full year, increasing the growth rate to 4% or 5%, credit neutral. Potentially with the approval of the board increasing the dividend growth rate. All of that is without any upsides, any future growth or any operational synergy. With respect to the specific question of breakup fees, it's 2.5% of equity, and that is just a shade over $200 million. It's actually $201 million. What would trigger that? I don't know. Somebody trying to come in and break up the deal and somebody figuring out that they got a better deal. I just really think that's unlikely. I think the deal protection language in this transaction, thinking about kind of the collaborative spirit that we've had in developing this transaction. Given the fact that this is not a synergy driven, but rather growth driven idea. All of these things make this completely compelling, among and between the two of us. After the deal closes, I'm sorry, after the market closes today, we will file the merger agreement, and you can pore through that to your heart's content. Is that $200 million payable to Southern or AGL? It depends on who breaks up. To us, if they break up. 200 either way. Okay. Yeah. No, it's to us. Right, we don't owe them. Is there any circumstance that you would owe them? No. I don't know AGL that well, but how far upstream is their most upstream gas asset? Yeah. As we talked about before, majority of what we're investing in now is very far downstream. The gas distribution right up to the meter at the premise. Even the interstate pipeline assets that we own now or are investing in are pretty far downstream. We do have some gas storage facilities in the Gulf Coast that allow us to help balance the market, just like Tom talked about the importance of renewables and needing natural gas infrastructure. Those storage facilities help balance those markets. That's probably, as far as the material assets, that's our furthest upstream asset that we have. Thank you again, and congratulations. Thank you, Paul. Appreciate it. Our next question comes from the line of James von Riesemann with Mizuho. Please go ahead. JVR, how are you? I'm good. Yourself? Awesome. Congratulations, guys. Hey, couple questions. Most of them have been asked and answered, but, on the vote mechanics, can you remind me why there's no Southern shareholder vote? Cash deal. Okay. Then, with respect to the mechanics on the AGL votes, what do they need in terms of an approval for the deal? Sure. This is Drew Evans from AGL. We'll require a shareholder approval at some point in this calendar year, likely. Then we'll require state approvals in most of the jurisdictions that we serve, and ultimately we'll have to wait through an HSR period. The shareholder approval is a majority of the outstanding shares. Right. Simple or super? Simple. Okay. I guess lastly, one question. Now that you're getting bigger into gas, is Southern Power still strategic? Absolutely. Okay. That's all I had. Talk to you later. You bet. Thank you, buddy. See you. Thanks. Our next question comes from the line of Ali Agha with SunTrust. Please go ahead. Ali, how are you? Thank you. Good morning. How are you, sir? Good morning. Morning. Couple of clarifications. One, just to understand the permanent financing of this deal. You're paying it for $8 billion, and you're saying that ultimately you'll have $3 billion of additional equity, which is about 38% if you do the math. The other $5 billion, is that all debt, or how should we think about the permanent financing, or is that enough equity, $3 billion, to pay for this? That's our plan, Ali Agha, $3 billion of equity by 2019. We'll issue a little debt ahead of that and take that out by the year 2019, such that we get back to, like I said, to our metric range, where we're currently rated. The debt will be issued as we would expect across the maturity range, as we issue it. You're correct in your statements. Okay. Secondly, also just to understand and make sure the apples to apples comparison is correct. The 4%-5% growth rate of 15, that's looking at 2015 through 2018, if memory serves me right. Previously you guys had said it would be 3%-4% on a Southern Company standalone. Can you just remind me, apples to apples, how that math works? You got it. Actually, this thing extends. We've been kind of thinking about 2019 in terms of the equity plan. I think we can talk in terms of through 2019, we'll get to 4%-5%, this thing looks attractive day one, the way we're structuring it. The way we do our math is 4% off the low and 5% off the high. Okay. Tom, previously, if it was Southern Company standalone, the math would have been 3%-4%, 2015 through 2019? That's right, three off the bottom and four off the top. Recall the range this year is 276-288. Grow 288 at 5%, grow 276 at 4% per year. By 2019, that suggests a range of 323-350. I'll just save you the math. We think we're well within that, very comfortable. Including no upside, no operational synergies, no further growth investments. Okay. I know, Tom, again, if memory serves me right, previously you had talked about a slowdown in the Southern standalone growth profile through maybe 2017, maybe 2018, but then a pickup again in the latter part of the decade. I guess I'm just trying to put this in context of that. What you're saying is, you're getting that growth earlier, is essentially what you're saying here. You're picking up that 100 basis points. Ali, all of that growth I suggested really related to the next generation of plants and the consequences of either new environmental regulations related to ash ponds and all the kind of 316(b) stuff. As well as, kind of as a consequence of the Clean Power Plan, what we're going to have to do to add in our territory, more gas assets, more renewables, more generation in general. We've always said that when you kind of look at the financials of Southern Company on a standalone basis before this transaction, in fact, one of my directors, David Grain, used a funny expression. He called it a divot in 2017, and a general slowdown. We think this transaction kind of fills in the divot, if you will, and provides us a very certain rate of growth. Let me remind you, at the end of this, all of those factors that I've talked about remain and are not part of our trajectory going forward. The trajectory we're talking about today is solely as a consequence of the joining of AGL Resources with Southern Company. The opportunities to grow with investments in new generation remain. As well as investments in new environmental remain. As well as investments in more Southern Power, as well as investments in more gas infrastructure. My sense is we've created a, and I hate to use the word platform, but we've created a wonderful platform to take this company and grow value to our shareholders. Okay. Last question, Tom. With this transaction, you're also obviously expanding the Southern footprint beyond your Southeastern territories. Illinois is going to become, relatively speaking, a bigger part of the mix. Of course, the Southeast has been your bread and butter. You've got very strong, deep relationships with the regulatory folks there. What's your comfort level in that expansion, and particularly getting into Illinois and Maryland and some of these other states? Well, let me first say, it's a compliment to everybody that works at AGL Resources, including John Somerhalder, Drew Evans, the whole team there. They've built a terrific business. They've been able to add to their asset mix in a very shareholder-friendly way. When I think about Illinois in particular, the growth in Illinois, as I've suggested kind of broadly when we look at a 6%-9% earnings per share growth trajectory for AGL Resources, most of that growth is already spoken for with riders. There's pipeline replacement programs. I mean, we're not betting on hockey sticks here. We think these are safety-related, sound investments that will continue. In the case of Illinois, I think the initial program goes until 2023. This is a trajectory that we can believe in. This company, AGL Resources, also has, like Southern does, very strong regulatory teams, good relations with their regulators, good standing in their jurisdictions, and has, as we do, a long-standing history of serving customers in the communities that they're privileged to reside in. We think we will help that. Together, we'll be very strong, we look forward to, I think as we have had in the Southeast for decades, constructive regulatory relations. Understood. Thank you. Thank you. Our next question comes from the line of Greg Gordon with Evercore ISI. Please go ahead. Hey, Greg. Greg? Greg, where'd you go? Mr. Gordon, your line is open. Please go ahead with your question. Please verify your line is open. I'm sorry about that. I was on mute. I apologize. Oh, man, you were on mute. Classic mistake. Anyway, I'm not that super familiar with AGL either, but I just pulled up a bunch of their analyst presentations. I'm looking at their presentation from AGA. It looks like they really have a lot of these infrastructure growth projects really start to kick in terms of EBIT contribution in the 2018, 2019 time frame. Is that why you are structuring the financing package the way you have with more debt up front and then feathering in the equity over time so that you fund the equity portion as the growth starts to kick in, so that that kind of is the financial logic around your growth rate aspiration? Yeah, I just say it a wee bit differently. When you think about it, if we did a slug of equity right now, I think we'd be over-equitized again to some extent. I think keeping in a very kind of rational process where we use our plans and use our DRIP program, minimize the impact of shares outstanding, maximize the impact of shareholder benefit, preserving credit quality, we think this is a plan that makes sense. Listen, we're good with our word. We've committed to the rating agencies that we've done these things in the past. They've stayed with us. We visited with them, had very constructive conversations. We look forward to moving forward. I think this is a sensible plan. On a risk-adjusted basis, it's a winner. Right. As you said, the acceleration and EBIT contribution coming from their investments in that 2018, 2019 timeframe, that's all stuff that you feel very comfortable with line of sight on. Absolutely. Great. Thank you very much. Thank you, sir. Operator, we have time for one more question. As you can imagine, we have a busy day today. For our AGL friends, sometimes our earnings calls sound like Berkshire Hathaway annual meetings. They go on forever. With the press of media and a variety of other things, if we could just take one more question. Certainly, Jimmy and Dan will be available in the boiler room later. Thank you. Our last question comes from the line of Mark Barnett with Morningstar. Please go ahead. Hey, Mark. Hey, good morning, everybody. Morning. Hey, Mark. Very exciting news covering both of you here for me. Thanks, Mark. Look, I know you want to get off to your business today. You haven't commented directly on the synergies. I know that that's obviously work you have some to do. If I think about your typical utility merger, we've started to see some bigger numbers come out from the bigger deals. This in particular, when you think about some of the back office sort of things within Georgia, that you might see some higher synergies. You may not be able to answer this, but we are thinking about 5%-7% of consolidated. Is that going to be a conservative target with this deal? Does it really provide some extra synergies you wouldn't have out of state, or am I thinking about this the wrong way? Look, I'd rather not get into that. It's absolutely certain that we believe we can bring value to customers. Our model, we've called it the circle of life in the past, the whole idea is to put customers in the middle of everything we do and to provide them with the best reliability, the lowest pricing, the best service possible. I may remind you that last year, our four companies, at least in the electric utility industry, were the top four customer satisfaction utilities in the U.S. among our peers. We will continue to seek to provide the best reliability, the lowest prices, and the best service possible. We'll take advantage of any efficiency we can gain in order to deliver that commitment. We think that really serves our business well and is the bedrock of our foundation for decades to come. I appreciate that. Again, congratulations on reaching an agreement. I look forward to talking to you guys a little bit more about this in the future. Thanks. Thank you, sir. Appreciate you calling in this morning. Well, operator, I guess that was the last call. Let me just finish off. When everyone looks at this transaction, I want them to know that the reason we found AGL so attractive as a target for us was because they have built a terrific business. Terrific leadership, terrific employees, terrific product. At the end of the day, making the communities they serve better because they're there. We think the addition of their skills, background, perspective, context, judgment to the Southern Company family provides us an opportunity to grow ourselves and to make the future even brighter for customers, for shareholders, and employees. They're terrific people to do business with, and we look forward to the years ahead. Thanks, everyone. Appreciate you joining us this morning. Thank you, sir. Ladies and gentlemen, this does conclude the call. You may now disconnect.