Analystscharacterized SouthernCo.'s deal to purchase half of a southeast natural gas pipelinesystem from Kinder MorganInc. as Southern's latest step toward growing its nonutilitybusiness through both regulated and renewable energy acquisitions.
Thecompanies announced adeal July 10 for Southern to become an equal partner on KinderMorgan's Southern Natural Gas Co.LLC for $1.47 billion. For Southern, the deal will allow greateraccess to natural gas at a time when the utility giant is increasing itsreliance upon the fuel and burning less coal. For Kinder Morgan, a way to slash debtand improve its balance sheet, with the aim of .
Thedeal also comes on the heels of a week where Southern announced the separatesolar generation projects in three different regions of the U.S. and 11 daysafter Southern announced theclosure of its $12 billion merger with AGL Resources.
CreditSightsanalyst Andy DeVries does not anticipate the additional $180 million of EBITDAacquired through the deal to have much of an earnings impact on Southern,compared to its expected $7.1 billion of EBITDA in 2016. He noted the $1.5billion purchase price for a 50% stake implies a $3 billion equity value and$4.2 billion enterprise value, which amounts to an enterprise value-to-EBITDAratio of 11.6x. "We think [Southern] is getting a good deal as wewould expect pure-play FERC regulated pipelines to trade closer to 12-14x inthis market," DeVries wrote.
He likened the deal to Consolidated Edison Inc.'s move to in a withCrestwood Equity PartnersLP as both cases represent electric utilities expanding intonatural gas. DeVries suggested these acquisitions are driven, in part, by theprospect of rooftop and utility-scale solar encroaching on the core electricdistribution business of utilities, even if that prospect may be as far away asa decade. "This is mostly an equity issue as we see regulators eventuallyquestioning how a dividend stream can keep growing every year while totaldeliveries are flat/down over the long-term," he wrote.
Jefferies analyst Anthony Crowdell described the deal as"break-even to slightly accretive" for Southern, forecasting 0 to 1cent of accretion, assuming Southern finances the acquisition through equalparts equity and debt. Jefferies noted net income by Southern Natural Gas hasvaried between $405 million and $394 million, highlighting a stability thatfits well with Southern's regulated asset base. "This acquisitioncontinues on the trend of the large-cap regulated utilities utilizing theirsignificant cost of capital advantage to acquire 'regulated-type' assets fromdistressed sellers," Crowdell wrote. "We have seen transactionsinvolving renewables and midstream assets and expect it to continue."Jefferies rates Southern "hold" with a $50 price target.
SunTrust Robinson Humphrey calculated the deal would be 3cents accretive to Southern EPS from 2017 onward and left its rating forSouthern at "neutral." That analysis is based on Southern financingthe deal with 56% debt and 44% equity and other assumptions.