Kinder Morgan's Pipeline JV with Southern Will Help Trim Debt
At first blush, Kinder Morgan's (KMI) - Get Report sale of half of its pipeline system Southern Natural Gas for $1.47 billion looks like a bargain for Atlanta utility Southern Co. (SO) - Get Report .
The deal, announced on Sunday night, worked out to around a 11.6 enterprise value-to-Ebitda multiple versus the 12 to 14 times a regulated pipeline would fetch in this market, according to analysts.
But Kinder Morgan management expects to make up for the shortfall with investment opportunities coming off the pipeline. "At a pure 10 times multiple, we would not have done this transaction," CEO and president Steve Kean said on a conference call with analysts on Monday. "It's what we can do with the value of the assets."
The Houston energy infrastructure company was coy about what those potential opportunities are, but analysts expect them to revolve around liquefied natural gas, or LNG, which can be exported to places that need it.
Jefferies LLC analyst Anthony Crowdell wrote in a report that he expects the deal to potentially add 1 cent to Southern's annual earnings per share but additional investments could potentially increase Ebitda by $238 million by 2018. He noted that Elba Liquefaction Co. LLC and Southern LNG Co. LLC have already proposed a two-phased project that will add liquefaction and export capability to Southern's LNG terminal at Elba Island in Georgia.
Crowdell said the acquisition continues the trend of large regulated utilities using their cost-of-capital advantage to buy "regulated-type" assets from distressed sellers, including renewable facilities and oil and gas midstream, or infrastructure, assets. "We expect it to continue," he said.
Indeed, this past April, Consolidated Edison (ED) - Get Report paid $975 million for half of a natural gas pipeline and storage joint venture in northern Pennsylvania and southern New York from Crestwood Equity Partners LP (CEQP) - Get Report . That deal implied a multiple of around 13 times Ebitda and Crestwood said it planned to use the proceeds to cut debt.
Kinder plans to do the same, freeing up cash that could be used for distributions or stock-buybacks, analysts say. "This is another step towards achieving our stated goals of strengthening our balance sheet and positioning the company for long-term value creation," Kean said in the statement announcing the deal.
Kinder has struggled like others in the oil and gas industry, cutting its distribution by 75% this past December. It previously said it might implement a joint venture structure on new projects in its backlog such as Elba and Palmetto and last month sold a 50% interest in its $500 million Utopia pipeline project to private equity firm Riverstone Investment Group LLC for an undisclosed sum.
Kean said on the conference call that more such deals may be coming, but it can be more selective now that it's inked the large pipeline deal with Southern. "We'll continue to look at JV's where they make sense," he said.
Kinder will continue to operate the 7,600-mile SNG pipeline system, which connects 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. It's 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 U.S.
"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 CEO Thomas Fanning said in the statement. "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."
The companies said the deal gives SNG a total enterprise value of $4.15 billion, including $1.2 billion in debt (which is expected to fall under the joint venture, not at the companies). Southern said it expects to finance the initial purchase, as well as any related future growth opportunities, in a "credit-supportive" manner. Crowdell thinks Southern will finance the deal with a 50% equity/50% debt capital structure.
The transaction has to clear Hart-Scott-Rodino but is expected to be completed in the fourth quarter.
Providing outside legal advice to Southern were Jones Day's Jeff Schlegel and David Stringer, Gibson Dunn & Crutcher LLP's William Scherman, Joshua Soven, Ruth Porter, Bob Nichols and Andrew Cline, Troutman Sanders LLP's Kevin Greene, Eric Koontz, Roger Reigner, Bob Edwards, Brandon Marzo, Frank Schiller, Allison Will and Melissa Oellerich and Balch & Bingham LLP's Scott Grover. Bracewell LLP's Jason Jean and Weil, Gotshal & Manges LLP's Steven Newborn, Rob Meyer and Vadim Brusser are representing Kinder.
Jones Day's other team members included Lizanne Thomas, Alex Wilde, Kit Rockhill, Kyle Kreshover, Greg Gordon, Amanda Suzuki, Jonathan Fisher, Walt Davis, Bob Watts, Joanna Sutton, Michelle Brown, Tyler Clarke, Sterling Spainhour, Chuck Wehland, Todd Wallace, Louis Jenull, Peter Laun, Joe Beauchamp, Scott Cowan, Chris Fox, Audra May, Katie Oldham and Melissa Pick.