NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded its Long-term Issuer Default Rating (IDR) and senior unsecured rating of Southern Natural Gas Company (SNG) to 'BBB+.' A Stable Rating Outlook has been assigned. Today's action resolves the Rating Watch Positive on which SNG was placed on July 11, 2016.
The upgrade follows the closure of Southern Company's (SO; IDR A-; Outlook Stable) acquisition of a 50% equity interest in SNG from Kinder Morgan Inc through a subsidiary of Southern Company Gas (SCG; IDR BBB+; Outlook Stable) for approximately $1.5 billion. (KMI; IDR BBB-; Outlook Stable). In association with the transaction KMI has released SNG from the cross guarantee that SNG currently provides to KMI and its other rated subsidiaries. KMI will temporarily continue to guarantee the SNG notes following the close.
SNG's ratings are reflective of the low risk nature of the FERC-regulated natural gas pipeline system coupled with solid credit and financial operating metrics and the expected release of the cross guarantee to KMI's debt. The acquisition of a 50% interest in the pipeline by a subsidiary of the higher rated SCG, which along with its parent SO also holds roughly 50% of the capacity on the pipeline, should benefit SNG from a strategic basis, aligning the pipeline with its largest customer and providing expansion opportunities for the pipeline system. Fitch expects leverage at SNG to be between 3.0x and 3.3x, with interest coverage of roughly 5.0x for 2016-2018.
KEY RATING DRIVERS
Strong Strategic Ownership: KMI and SCG and SO, through SCG, represent strong strategic owners of the SNG pipeline system. SO, following its acquisition of SCG, has become one of the largest natural gas consumers and distributors in the country. The SNG system fits strategically with SO's gas distribution service territories and the locations of its gas-fired generating plants. KMI is currently the largest midstream infrastructure company in the U.S., possessing a strong, diverse asset portfolio which spans multiple business lines, including the largest interstate natural gas pipeline system in the country allowing access and delivery capability to all of the major gas production and demand regions in the country. The sale of SNG allows KMI to monetize an asset and pay down debt while continuing to maintain an operating interest in an asset with strong cash flows and appealing growth prospects. Both owners should provide operational and growth benefits to SNG going forward.
Stable Earnings and Cash Flows: SNG's revenue and cash flow profile is supported by long-term capacity reservation contracts with a strong majority of investment grade counterparties which provide most of the pipeline system's revenue independent of volumes shipped through the system or commodity prices. SNG's contracts are largely demand pull contracts with utility counterparties, with the new owner, SCG, being the largest holder of capacity on the system.
Geographic Advantages: SNG serves the Southeastern U.S. where Fitch expects gas demand to grow moderately in the near to intermediate term. SNG is the principal natural gas transporter to markets in Alabama, Georgia and South Carolina. These states are part of the fastest growing natural gas demand regions in the U.S. With the addition of SO as an owner, SNG should benefit from positive demand trends in SO's service territories.
Key assumptions within the rating case for SNG include:
--The $500 million April 2017 maturity is assumed to be refinanced at SNG.
--All cash available for distribution assumed to be paid as dividends to owners.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--A positive rating action is not anticipated in the near to intermediate term. If leverage were expected to be below 2.5x on a sustained basis Fitch may consider a positive rating action.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--A significant change in cash flow stability profile. A move away from current significant majority of capacity being contracted with investment grade counterparties.
--Leverage above 4.0x on a sustained basis
--Negative ratings actions at one or both of SNG's owners could lead to a negative ratings action depending on the magnitude of the negative ratings actions and the impact on SNG's operating or financial profile.
Liquidity at SNG is adequate with the pipeline generating roughly $300 million in free cash flow before dividends and working capital needs are low. SNG has entered into a $75 million revolver that should provide more than enough support for the pipelines working capital needs. The revolver matures in 2021. Maturities are manageable with $500 million in notes coming due April 1, 2017. Fitch expects these notes to be refinanced at the SNG level.
FULL LIST OF RATING ACTIONS
Fitch has upgraded the following ratings:
Southern Natural Gas Company
--Long-Term IDR to 'BBB+' from 'BBB-';
--Senior unsecured rating to 'BBB+' from 'BBB-'.
The Rating Outlook is Stable.
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor must be disclosed (in bullet points). Analysts should refer to the relevant section of the Data Control Form and discuss and agree the proposed disclosure at the rating committee. This disclosure should appear after the analyst contact information.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
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