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Southern Company Buying Half of Southern Natural Gas System From Kinder

Southern Company is acquiring a 50% equity interest in the Southern Natural Gas (SNG) pipeline system from Kinder Morgan Inc. (KMI). The joint venture (JV) partners plan to "pursue specific growth opportunities" to develop natural gas infrastructure.

Southern is paying about $1.47 billion and assuming $600 million (or half) of SNG debt. KMI will continue to operate SNG.

The system consists of 7,600 miles of pipeline connecting natural gas supply basins in Texas, Louisiana, Mississippi, Alabama and the Gulf of Mexico to markets in Louisiana, Mississippi, Alabama, Florida, Georgia, South Carolina and Tennessee. SNG is a principal transporter of natural gas to Alabama, Georgia and South Carolina, which are part of one of the fastest-growing natural gas demand regions in the United States, KMI said.

"This transaction is consistent with the infrastructure development strategy we have discussed for well over a year. The company's strategic venture with Kinder Morgan, combined with our recent additions, AGL Resources and PowerSecure, underscore Southern Company's leadership position in electricity and natural gas and our commitment to developing America's energy infrastructure," Southern Company CEO Thomas A. Fanning said Sunday. "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."

KMI Chairman Rich Kinder said during a conference call that his company and Southern “have a similar outlook on the world.” That is that “natural gas is the future for electric generation.”

Almost one year ago Southern announced the $12 billion deal to acquire AGL Resources, creating a combined company with 11 regulated electric and gas distribution companies serving nine million customers with a projected rate base of $50 billion (see Daily GPIAug. 24, 2015). The transaction closed earlier this month (see Daily GPIJuly 5).

Jefferies analysts wrote Monday that SNG is regulated by the Federal Energy Regulatory Commission and has provided "very consistent earnings over the past several years. Since 2013, net income on SNG has varied between $405 million and $394 million, highlighting the stability in earnings that will fit nicely with Southern's other regulated asset base."

Additionally, SNG will have incremental pipeline investment opportunities related to liquefied natural gas (LNG), Jefferies said. KMI units Elba Liquefaction Co. LLC and Southern LNG Co. LLC are developing the Elba Liquefaction Project in Georgia (see Daily GPIJune 2).

KMI CEO Steve Kean said the company will use proceeds from sale of the 50% SNG stake to reduce debt. "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. Late last month, KMI took a partner in its Utopia Pipeline Project, which would carry ethane from Ohio to Sarnia, ON (see Daily GPIJune 29).

Inclusive of existing SNG debt, the transaction equates to an SNG total enterprise value of about $4.15 billion, which implies a value of $1.47 billion for Southern Company's 50% share of the equity interest. Southern Company expects to finance the initial purchase, as well as any related future growth opportunities in a "credit-supportive manner."

Kean said the transaction will be accretive to KMI in the “medium term” and only slightly dilutive “between now and then.” Talks with Southern were under way more than a year ago, before “all of the volatility in the midstream sector kicked in,” Kean told analysts during a conference call Monday to discuss the deal.

The JV transaction is a bit unusual as it involves an existing core asset at KMI, Kean allowed. He said another like it in that regard is not likely, but other deals are possible.

He would not go into any detail about incremental opportunities available to the SNG JV except to say that the deal wouldn’t have been done without them.

Jefferies gave a nod to other similar transactions of late. "The acquisition continues on a trend of large-cap regulated utilities utilizing their significant cost of capital advantage to acquire 'regulated-type' assets from distressed sellers," Jefferies analysts wrote. We have seen transactions involving renewables and midstream assets and expect it to continue."

Kean said the credit ratings agencies view the transaction as “credit positive” for KMI. The deal is subject to antitrust clearance. Closing is expected in the third or fourth quarter.

Separately on Monday, Southern Company announced a rebranding initiative, including a new logo, in light of the expansion of its natural gas presence. The recently acquired AGL Resources has been renamed Southern Company Gas.

"Southern Company's recent growth in natural gas has expanded our business beyond electricity, providing an excellent opportunity to review our brand," Fanning said. "By adding Southern Company Gas while developing the full energy portfolio, Southern Company has doubled its customer base, expanded its footprint and broadened the scope of our business. Today we are a leading national energy company that is better positioned to deliver real solutions for customers."

The company also recently acquired PowerSecure, which is engaged in distributed infrastructure development.

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