S&P: Southern Natural Gas Co. LLC Upgraded To 'BBB+', Off Watch Positive; Outlook Stable
"The rating action reflects our view of SNG's stand-alone credit quality, which reflects a strong business risk profile and intermediate financial risk profile," said S&P Global Ratings credit analyst Michael Grande. SNG has a solid competitive position as a regional demand-pull pipeline for end-user markets in Alabama, Georgia, and South Carolina. Firm transportation contracts account for about 90% of capacity, which provides stable and predictable cash flows. The customer mix consists mainly of utilities, with Southern Co. being the largest customer, consisting of about 50% of pipeline capacity. The average shipper rating is in the 'A' category with an average contract life of about 5.5 years.
The financial risk profile of intermediate reflects our expectations that the total debt to EBITDA ratio will be in the low-3x area and interest coverage will be between 5x and 6x. While we expect the strategic partnership to lead to expansion opportunities, our financial risk assessment assumes that the pipeline's future capitalization will be mostly unchanged. We also expect that any free cash flow after debt service and capital spending will be distributed to the sponsors.
The stable outlook on SNG reflects our expectations that the pipeline will maintain a solid competitive position supplying natural gas to the Southeast U. S. and strong credit measures, such as total debt to EBITDA in the 3x to 3.5x area.
We could lower the ratings if SNG recapitalizes the pipeline and increases total debt to EBITDA above 4x. We could also lower the rating if the pipeline's competitive position weakens such that contracted capacity declines or is renewed at significantly lower rates.
We view an upgrade as unlikely, but would consider it if the sponsors considered a notably more conservative financial policy, which would result in sustaining a total debt to EBITDA ratio of about 2x.