Kinder Morgan-Southern Company Natural Gas Pipeline Deal

Fitch views the joint venture with KMI as part of Southern Company’s continued effort to diversify its predominantly integrated electric utility operations into natural gas infrastructure and expand its existing midstream natural gas pipeline investments acquired through the AGL acquisition.

Southern said it will finance the $1.5 billion deal and future projects in a “credit-supportive manner”, but didn’t elaborate.

Kinder Morgan Inc (NYSE:KMI) investors are applauding KMI’s move to sell 50% of its stake in the 7,600-mile Southern Natural Gas pipeline to Southern Co (NYSE:SO) for $1.47 billion.

Southern Co. said its deal with Kinder Morgan will give customers more supply access and position the company for future growth: It would operate 11 regulated utilities providing service to approximately 9 million customers, making it the second-largest combined gas and power utility in the country. “We’re just very happy to do this transaction with Southern Company”, Kinder Morgan Chairman Richard Kinder said.

Pending regulatory approval, the companies expect to complete the transaction in the third quarter or early in the fourth quarter of 2016. “This is another step towards achieving our stated goals of strengthening our balance sheet and positioning the company for long-term value creation”, he said. In a statement Monday, Fitch Ratings said it expects the transaction to be credit positive for Kinder Morgan, but it would not change the company’s current ratings and outlook.

Jones Day, Gibson Dunn & Crutcher LLP, Troutman Sanders LLP and Balch & Bingham LLP are serving as legal counsel to Southern Company, and Bracewell LLP and Weil, Gotshal & Manges LLP are serving as legal counsel to Kinder Morgan. (NYSE: KMI) is the largest energy infrastructure company in North America. Credit Suisse’s 2017 EPS actually ticked lower by $0.01 to $0.84 (DCF per share down $0.01 to $2.27) as the interest savings are offset by the lost EBITDA for the Southern Natural Gas deal.

Companies employed in the oil and gas industry are facing an enormous liquidity crisis. Kinder Morgan CEO Steven Kean cited Southern Company’s importance as a gas customer in the Southeast as well as other regions. Southern’s growing appetite for gas at the expense of coal “should provide growth opportunities” for the pipeline network.

Southern Company, whose electric power subsidiaries operate in Alabama, Florida, Georgia and MS, relied on gas for 47% of its generation in 2015, compared to 23% in 2009, and that share is likely to continue to grow. Southern Company has been named by the U.S. Department of Defense and G.I. Jobs magazine as a top military employer, recognized among the Top 50 Companies for Diversity by DiversityInc, listed by Black Enterprise magazine as one of the 40 Best Companies for Diversity and designated a Top Employer for Hispanics by Hispanic Network.