Fitch: Southern Co’s Ratings Unchanged by Gas Pipeline Venture with KMI

Fitch Ratings expects Southern Company's ('A-'/Outlook Stable) gas pipeline joint venture with a subsidiary of Kinder Morgan, Inc. (KMI, 'BBB-'/Outlook Stable) to have no impact on its credit ratings. Fitch expects that Southern Company will fund the acquisition and future growth investments at the JV as well as at Southern Power Company in a credit supportive manner.

In May 2016, Fitch downgraded Southern Company's Issuer Default Rating (IDR) by one notch to 'A-'. The company's FFO adjusted leverage would need to improve and sustain below the 4.5x level before Fitch would consider any upward migration of the ratings.

Through the joint venture, Southern Company will acquire an equity interest in KMI's Southern Natural Gas (SNG) pipeline system valued at $1.47 billion. The transaction, which is expected to close in the third quarter or early fourth quarter of 2016, values SNG at $4.15 billion, which includes existing SNG debt. In association with the transaction, SNG will be released from the cross guarantee that it provides to KMI and KMI's other subsidiaries, which Fitch considers as credit positive as SNG's standalone financial profile is stronger than KMI.

Following its recently completed merger with AGL Resources, Inc. (AGL, 'BBB+'/Outlook Stable), Southern Company has become one of the largest natural gas consumers and distributors in the country. Fitch views the joint venture with KMI as part of Southern Company's continued effort to diversify its predominantly integrated electric utility operations into natural gas infrastructure and expand its existing midstream natural gas pipeline investments acquired through the AGL acquisition.

The SNG system fits strategically with Southern Company's gas distribution service territories and the locations of its gas-fired generating plants. Additionally, SNG's earnings and cash flow are supported by long-term capacity reservation contracts with a majority of investment grade offtakers providing the most of the revenue independent of volumes shipped through the system or commodity prices.

Additional information is available at 'www.fitchratings.com'.

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