Moody’s Investors Service affirmed the ratings of Southern (NYSE:SO), including its Baa2 senior unsecured rating and Prime-2 short-term rating for commercial paper, after the announcement that it will invest approximately $1.47bn to acquire a 50% interest in a major interstate gas pipeline.
Southern Natural Gas (Baa3 stable), in a joint venture with Kinder Morgan Inc. (Baa3 stable), which will own the remaining 50% interest. Kinder Morgan currently owns 100% of the pipeline and will continue to be the operator after the formation of the joint venture, which is expected to close in the third or fourth quarter of 2016.
“The ratings affirmation reflects our expectation that Southern will finance a significant portion of the transaction with equity, in contrast to the larger, recently closed acquisition of AGL Resources, Inc. (AGL), which was financed predominantly with debt”, said Michael G. Haggarty, Associate Managing Director.
“As a result, we do not project the pipeline investment to materially affect Southern’s cash flow coverage metrics and continue to expect the company’s CFO pre-working capital to debt to be in the 15% range for at least the next two years”, added Haggarty.
Southern Natural Gas represents Southern’s first major investment in the gas midstream sector following the acquisition of local distribution company AGL earlier this month The pipeline is highly contracted and serves much of Southern’s service territory, providing gas to AGL as well as to several of Southern’s gas plants in Alabama and Georgia. Southern subsidiaries currently account for nearly 45% of the total volume shipped on the pipeline. Similar to the AGL acquisition, Southern Natural Gas provides further diversification into the natural gas sector from Southern’s traditionally predominantly electric business. The company intends to use the joint venture to pursue additional natural gas infrastructure projects and opportunities.
Negatively, Southern will assume approximately $600m of Southern Natural Gas debt and will issue some additional debt to finance the transaction, which the company has indicated will not be at the Southern parent company. This would keep the percentage of Southern parent company debt in the 25% range, where it has been since the AGL acquisition financing, Moody’s said.
The ratings affirmation assumes that there will be no change in consolidated financial metrics as a result of the transaction, Moody’s said.