OREANDA-NEWS. Fitch Ratings expects the announced sale of a 50% interest in Southern Natural Gas (SNG) for $1.47 billion by Kinder Morgan, Inc. (KMI; 'BBB-'/Outlook Stable) to Southern Company, Inc. (SO; 'A-'/Outlook Stable) to be credit positive for KMI but not change the company's current ratings and Outlook.

Proceeds are expected to be used to pay down debt at KMI. The transaction should be deleveraging for KMI given the use of proceeds. SNG will no longer be subject to the cross guarantee amongst and between KMI and most of its major EBITDA producing wholly-owned subsidiaries. The transaction is subject to Hart-Scott-Rodino review and is expected to close sometime before the end of 2016.

Fitch believes the sale to be a positive step in KMI's commitment towards focusing on the balance sheet and decreasing overall leverage. Selling a stake in SNG allows KMI to monetize an asset and pay down debt while continuing to maintain an interest in a strong cash flow providing asset with decent growth prospects. As a strategic partner and the number one customer on the pipeline, SO should help minimize recontracting risk at SNG and provide opportunities for growth along the SNG system, which overlays a large portion of SO's service territories.

Pro forma for the transaction Fitch expects KMI's debt/adjusted EBITDA to be close to 5.3x -5.4x for 2016, which represents a slight improvement in expected leverage. Leverage is expected to continue to improve in 2017 and 2018 as KMI works through its planned growth spending. Offsetting concerns around high leverage through the construction cycle is the strength of KMI's asset size, scale and cash flow profile, and cash retention from last year's cut to the dividend. Further meaningful reductions in leverage with debt/adjusted EBITDA between 4.5x and 5.0x on a sustained basis could lead to a positive ratings action.

KMI's ratings reflect its position as one of the largest and most important energy companies in the U. S., with significant positions in must-run assets that support national energy infrastructure. The ratings are supported by KMI's significant cash flow stability, driven by the high percentage of KMI's assets being either fee-based or hedged and Fitch's expectations that KMI's high percentage of fixed fee-generating assets will minimize earnings and cash flow volatility even as oil and gas prices continue to languish and hedges roll off.