Southern Co. (SO), the largest customer of Kinder Morgan Inc.’s (KMI) Southern Natural Gas (SNG) pipeline is buying a 50% stake in the line for $1.47 billion cash, the companies said July 10.

The joint venture (JV) puts the value of the SNG line at about $4.15 billion. SNG is a 7,600-mile natural gas pipeline system that serves multiple states and will help Southern continue to supply hydrocarbons to gas-powered power generation in the southeast.

SNG connects natural gas supply basins in Texas, Louisiana, Mississippi, Alabama and the Gulf of Mexico to markets in Louisiana, Mississippi, Alabama, Florida, Georgia, South Carolina and Tennessee.

SNG is a principal transporter of natural gas to Alabama, Georgia and South Carolina, which are part of one of the fastest-growing natural gas demand regions in the U.S.

Richard Kinder, KMI’s executive chairman, said the strategic partnership with Southern commits the companies to expansion of the system over the next few years.

“This is actually accretive to KMI in terms of distributable cash flow and EBITDA, while allowing us to substantially improve our balance sheet,” Kinder said on a July 11 conference call.

KMI President and CEO Steve Kean said the transaction is accretive in the medium term, and is only slightly dilutive before then.

“That’s unusual in a transaction where the cash proceeds are being used to pay down debt,” Kean said. “It’s happening here as a result of a specifically identified opportunity for asset additions and expansions we’ll be pursuing and starting to bring on as early as 2017.”

Kinder said the overarching premise of the deal was a partnership with a company that shares KMI’s view “that we’ve been harping on for so long--that natural gas is the future for electric generation.”

“This just positions us much better in the most prolific natural gas electric usage area in the southeast,” he said.

Southern Co. chairman, president and CEO Thomas A. Fanning said the transaction was in line with a development strategy the company has explored for more than a year.

“The company’s strategic venture with Kinder Morgan, combined with our recent additions, AGL Resources and PowerSecure, underscore Southern Co.’s leadership position in electricity and natural gas and our commitment to developing America’s energy infrastructure,” he said. “Our new ownership stake in SNG will position Southern Co. for future growth opportunities and enhanced access to natural gas, which are expected to benefit customers and investors alike.”

Kean said that KMI’s credit rating services reviewed the deal and sees it as a positive for the company. The deal will lower debt and provide greater returns by 2017, which KMI will use to increase dividends or buy back stock to increase shareholder value.

“This was a transaction we were exploring a year ago even before all the volatility in the midstream sector kicked in,” Kean said.

At SNG’s $4.15 billion enterprise value, which includes $1.2 billion of existing debt, the 2015 EBITDA multiple is 10.4x. With the value enhancements committed to by the JV, Kean expects the multiple to be “a couple of turns higher, ultimately; and that’s what makes this deal worthwhile.”

Kinder Morgan will continue to operate the system. In addition, the agreement commits the companies to cooperatively pursue specific growth opportunities to develop natural gas infrastructure for the strategic venture.

Asked by analysts if KMI would continue to look for JV opportunities, Kean said the SNG deal is unusual because the pipeline is an existing asset.

“We’re going to continue to look at selective JV opportunities where they make sense and continue to look at them on some of our major projects,” he said. “Other than what I would call a few isolated noncore asset dispositions, I don’t think you should be looking at a JV of an existing, fairly core asset.

“This can make us be a lot more patient and selective,” he said.

The transaction requires approval under the Hart-Scott-Rodino Antitrust act.

Jones Day, Gibson Dunn & Crutcher LLP, Troutman Sanders LLP and Balch & Bingham LLP are serving as legal counsel to Southern Co., and Bracewell LLP and Weil, Gotshal & Manges LLP are serving as legal counsel to Kinder Morgan.

Darren Barbee can be reached at dbarbee@hartenergy.com.

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