Here is how to think about Kinder Morgan's joint venture with Southern Co., announced this weekend: A company that grew too fast for the market's comfort is getting cash from a company the market loves but which has a long-term growth problem. This chart sums it up.
Kinder Morgan, you may recall, slashed its dividend late last year, in a drastic effort to deal with debts built up during the shale-related pipeline boom and the effective shutdown of the equity market as investors began to take notice of the sector's balance sheets (see here and here for a fuller explanation). Since then, it has been cutting its investment budget and selling assets to hurry the process along.
Selling a 50 percent stake in the Southern Natural Gas pipeline system to Southern provides another nudge. Kinder Morgan will get a check for $1.47 billion and deconsolidate $600 million of debt. Even factoring in the loss of about $200 million of Ebitda -- half of what the SNG system generates per year -- that takes Kinder Morgan's trailing net debt to Ebitda multiple down from 5.6 to 5.5 times. Like I said, a nudge.
Kinder Morgan framed the deal as just the start of a deeper partnership aimed at growing the SNG system. Indeed, this is a crucial point. The transaction values the whole pipeline at $4.15 billion, including net debt, or 10.4 times its 2015 Ebitda. With Kinder Morgan's own stock trading at 11.2 times, it will need to demonstrate to investors this wasn't a fire sale of a solid, cash-generating asset. The company wasn't giving too many details on Monday morning's call, but was quick to say further opportunities created by the deal would nudge the effective multiple up beyond 12 times. Watch that space.
As for Southern, its M&A team have been working overtime these past 12 months, racking up more deal volume than any other U.S. utility in that time, Bloomberg data show.
Apart from the dollars spent, the more notable aspect is what Southern's been buying -- mainly, a lot of stuff that doesn't involve burning coal and sending the resulting power over the grid. Of 9 deals listed, 6 involved scooping up wind and solar generation. Another one, the acquisition of PowerSecure International, was all about energy-efficiency services. The last 2 deals, including this latest one with Kinder Morgan, are all about natural gas.
What unites all these is a desire for growth and the means to pursue it. U.S. electricity sales are flat-lining due to conservation and efforts by both households and businesses to either generate their own electricity or break with traditional providers. So utilities like Southern are searching for ways to maintain earnings and dividend growth. Buying into renewables and gas offers this.
Meanwhile, despite net debt having climbed from 3.9 times to 4.3 times Ebitda over the past couple of years, according to Bloomberg data, Southern's regulated utility business makes it a darling of yield-starved, macro-spooked markets. Its 10-year bonds yield all of 2.6 percent. That has enabled Southern to pay eye-popping multiples for some of its deals, notably for PowerSecure and the $11.9 billion takeover of gas utility AGL Resources completed earlier this month.
On that basis, this latest deal with Kinder Morgan at least looks relatively cheap compared to where pipeline stocks are trading now. It won't be lost on others in the pipeline sector, still struggling to cut debts and tied to sloppy oil prices, that there is an opportunity to tap into utilities' balance sheets in exchange for assets. For investors buying utility stocks at close to record high prices, though, Southern's spree is a cause for concern.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
From a GAAP perspective, Kinder Morgan will actually take $1.2 billion of debt off its books as that will now reside at the joint-venture level. Still, creditors won't just ignore the half that comes with Kinder Morgan's 50 percent stake.
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Liam Denning in San Francisco at firstname.lastname@example.org
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