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A look back at Southern's deal with Kinder Morgan


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A look back at Southern's deal with Kinder Morgan

A weekly recap of SNL Energy'scoverage of major themes in the natural gas industry.

The latestmove in the electric utility/midstream deal trend, Southern Co.'s plan to acquire a 50% stake in a natural gas pipelinesystem, shows how the two sectors of the energy industry can benefit by workingtogether.

Daysafter closing a deal to buy the largest natural gas utility business in the country,Southern dove further into the gas industry with its decision to purchase half ofthe Southern Natural Gas Co. LLCpipeline system for $1.47 billion. Including existing debt at Southern Natural Gas,the transaction places the pipeline system's enterprise value at about $4.15 billion.

"Thistransaction is consistent with the infrastructure development strategy we have discussedfor well over a year. The company's strategic venture with Kinder Morgan, combinedwith our recent additions, AGL Resources and PowerSecure, underscore Southern Company'sleadership position in electricity and natural gas and our commitment to developingAmerica's energy infrastructure," Southern CEO Thomas Fanning said. "Ournew ownership stake in SNG will position Southern Company for future growth opportunitiesand enhanced access to natural gas, which are expected to benefit customers andinvestors alike."

The pipelineconnects gas supply regions in Texas, Louisiana, Mississippi, Alabama and the Gulfof Mexico to consuming markets across the Southeast. Kinder Morgan would continueto operate the system, which is a main source of natural gas for the fast-growingdemand in Alabama, Georgia and South Carolina.

KinderMorgan Chairman Richard Kinder said that bringing in Southern as an equal partneron the pipeline system is a step toward returningvalue to shareholders after the midstream giant was forced to its quarterly dividend in 2015.

"Thisis actually accretive to KMI in terms of distributable cash flow and EBITDA overthe medium turn while allowing us to substantially improve our balance sheet and,therefore and most importantly, get measurably closer to being able to return moredollars to our shareholders through either increased dividends or buying back stockin KMI," Kinder said in a July 11 call on the deal, which had been in the worksfor over a year.

Kinder,Kinder Morgan President and CEO Steve Kean, and CFO Kimberly Dang emphasized thatthe deal provides short-term and long-term strategic benefits, allowing Kinder Morganto both pay down its debt and build up the revenue potential of the Southern NaturalGas system, which will grow and expand in the U.S. Southeast.

Keansaid Kinder Morgan would not have done the transaction for its valuation alone,about a 10.4x EBITDA multiple. "It is the value enhancements and what theydo to the underlying asset," he said. He declined to go into details on thepotential returns generated by Southern Natural growth projects, but expected theywould help "the overall multiple of the transaction by a couple of turns."

The growthprojects envisioned on the system would involve "additions and expansions,"Kean said, likely including laterals to power plants and lines to gas distributionsystems.

For Southern,the deal will allow greater accessto natural gas at a time when the utility giant is increasing its reliance uponthe fuel and burning less coal. SNL Energy pipeline data Southern Co.'s growing gas demandfrom its power plants and its newly branded utility segment and speaks volumes aboutwhy the conglomerate paired up with Kinder Morgan.

Looking forward, analysts expect more utility/midstream partnershipson the horizon. Midstreammaster limited partnerships are cash hungry given the prolonged slump in commoditiesprices, so they have become a covetedinvestment destination for electric utilities adjusting to surging naturalgas demand and unabated coal plant retirements.

"Utilitymanagements believe that natural gas will continue to gain market share as a fuelof choice. And that requires pipeline infrastructure to support [the rising demandfor gas]. So, the utilities see growth in that," Ali Agha, analyst at SunTrustRobinson Humphrey, said in an interview.