's decision tobring in Southern Co.as an equal partner on the SouthernNatural Gas Co. LLC pipeline system is a step toward returningvalue to shareholders after the midstream giant was forced to its quarterly dividend in2015, Chairman Richard Kinder said.
"Thisis actually accretive to KMI in terms of distributable cash flow and EBITDAover the medium turn while allowing us to substantially improve our balancesheet and, therefore and most importantly, get measurably closer to being ableto return more dollars to our shareholders through either increased dividendsor buying back stock in KMI," Kinder said in a July 11 call on the deal,which had been in the works for over a year.
SouthernCo. will acquire a50% stake in the 7,600-mile Southern Natural Gas interstate pipeline system for$1.47 billion and it will jointly develop expansions with Kinder Morgan. Thecompanies plan to close the deal as early as the third quarter.
Thecombined Southern Co. and AGL Resources represent just under half the partieson the Southern Natural Gas system, making the company "the largestcustomer by quite a margin," Steve Kean, Kinder Morgan President and CEO,said.
KinderMorgan has been freeing up cash and trimming debt for months, and in late 2015took the bold step of cutting its quarterly dividends by 75% in an attempt tomanage costs during a difficulttime for the gas industry brought on by low commodity prices.
Keansaid Kinder Morgan would not have done the transaction for its valuation alone,about 10.4x EBITDA multiple. "It is the value enhancements and what theydo to the underlying asset," he said.
Kinderagreed that his company would not have accepted the deal without the jointventure agreement to grow the Southern Natural Gas system. "[Southern Co.]has a similar outlook on the world [to the one] we've been harping on for solong: that natural gas is the future for electric generation," Kindersaid. "This just positions us much better in the most prolific natural gasusage area for generation in the Southeast."
Thegrowth projects envisioned would involve "additions and expansions,"Kean said, likely including laterals to power plants and lines to gasdistribution systems. The opportunities have been identified and "negotiatedin just about every instance already," Kean said. Projects will beintroduced as soon as 2017, he said.
Keansaid Kinder Morgan will probably not enter another partnership with existingcore assets like the Southern Natural Gas system; instead
TheKinder Morgan executives said they had discussed the deal's impact with creditagencies, and the agencies saw the deal as credit positive, reinforcing KinderMorgan's existing investment-grade rating but not changing it.
Shortlyafter noon on July 11, KMI shares were trading up by nearly 4% to $19.28
TudorPickering Holt & Co. analysts expect cash to return to KMI shareholderseither through buybacks or increased dividends by 2018 or possibly sooner.
"Withmegaprojects Trans Mountain and Elba Island looking more likely, we like [the]proactive move to offset potential CapEx spend by bringing in [a] partner on[the] existing asset," TPH analysts said in a research note. "SouthernCompany already constitutes ~25% of total firm transport on SNG with [the] newJV likely having the inside track supplying further combined cycle buildoutacross the southern US."
BarclaysCapital Inc. analysts also focused on growth opportunities of the venture. "Weare a bit surprised that the company has placed a cash flow generating assetinto a JV, so we can only assume there is a strategic rationale behind themove," analysts wrote. "We would guess that Southern Company islikely a top 5 customer or so of Kinder Morgan post their acquisition of AGLResources and this JV deal would indicate that Southern Company isn't donegrowing its natural gas asset portfolio."