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Southern expands gas footprint with $1.5 billion Kinder deal

🕐 2 min read

Southern Company bought a 50 percent stake in Kinder Morgan’s Southern Natural Gas pipeline system in the latest expansion into gas shipping by a power generator amid slipping electricity demand.

Houston-based Kinder Morgan will continue to operate the 7,600-mile (12,000-kilometer) system that connects gas fields across the Gulf Coast and Gulf of Mexico to markets in the Deep South including some where Southern operates, the companies said in a joint statement Sunday.

Southern’s stake has an implied value of $1.47 billion, based on a debt-inclusive total enterprise value of about $4.15 billion for the pipeline system, according to the statement. The second-largest U.S. utility by customers said it expects to finance its purchase in “a credit-supportive manner.”

“This looks like this another example of a significant acquisition by Southern into the gas sector,” said Paul Patterson, a New York-based utility analyst for Glenrock Associates LLC. “Right now, the devil is in the details and we don’t have a lot of them.”

One of the nation’s biggest users of coal, Atlanta-based Southern was among the first power companies to buy gas assets as electricity demand slumped and coal took a backseat to gas. Duke Energy Corp. and Dominion Resources Inc. followed suit. Last month, Southern received clearance for its $8 billion takeover of gas distributor AGL Resources Inc., giving the company 11 regulated utilities providing service to about 9 million customers in nine states.

“The notion of being long gas infrastructure between now and 2050 is a real winner,” Southern Chairman and Chief Executive Officer Thomas A. Fanning said in a June 29 interview on Bloomberg Television. An interstate pipeline would provide “terrific synergy” with a generation fleet that’s switching to gas from coal, he said.

Gas surpassed coal as the premier fuel for U.S. power generation in April 2015, according to the Energy Information Administration. Coal’s dominance of the nation’s electricity-generation market began to slide as far back as 2009 as a flood of gas from shale formations crashed prices and made it a cheap alternative to the more-polluting fuel, the EIA said in a March report.

Kinder plans to use all of the proceeds to pay down debt, Kinder CEO Steve Kean said in the statement.

Kinder has canceled or postponed more than $4 billion in new pipeline projects this year and sold stakes in existing conduits to raise cash and cope with the worst energy market in a generation. North America’s largest pipeline operator also began demanding collateral from some customers in April as shrinking cash flows and bankruptcies among coal and gas producers threatened Kinder’s ability to get paid.

The creation of Texas billionaire Rich Kinder slashed dividend payouts by about 75 percent at the beginning of this year to conserve cash needed to service a debt load that more than doubled in the past four years to $40.2 billion.

With assets stretching from Canada’s Pacific Coast to the U.S.-Mexico border, Kinder Morgan owns enough pipelines to circle the Earth three times.

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