Rating Action: Moody's affirms Southern Company Gas Capital's Baa1 senior unsecured rating; outlook is stable
Global Credit Research - 15 Jul 2020
Approximately $4.8 billion of debt securities rated
New York, July 15, 2020 -- Moody's Investors Service (Moody's) affirmed Southern Company Gas Capital's (Southern Gas Capital) Baa1 senior unsecured rating and P-2 short-term rating for commercial paper. Southern Gas Capital's ratings reflect the unconditional guarantee of Southern Company Gas (Southern Gas, unrated), an intermediate holding company of The Southern Company (Southern, Baa2 stable). The outlook remains stable.
..Issuer: Southern Company Gas Capital
....Gtd Senior Unsecured Regular Bond/Debenture, Affirmed Baa1
....Gtd Senior Unsecured Revolving Credit Facility, Affirmed Baa1
....Gtd Senior Unsecured Commercial Paper, Affirmed P-2
..Issuer: Southern Company Gas Capital
....Outlook, Remains Stable
"Southern Gas Capital's rating reflects the credit strength of its core gas distribution utilities and the supportive regulatory jurisdictions in which they operate" said Jeff Cassella, VP -- Senior Credit Officer.
Southern Company Gas Capital's credit quality is supported by Southern Gas' portfolio of predominantly low-risk regulated natural gas local distribution companies (LDCs) and contracted pipelines. Southern Gas benefits from the predictable cash flow and stable financial profiles of its LDCs, the credit supportiveness of their regulatory environments as well as the contracted cash flows generated by natural gas pipelines regulated by the Federal Energy Regulatory Commission (FERC).
The rating is constrained by Southern Gas' higher risk business activities which account for about 10-15% of consolidated results and consist of non-regulated gas marketing and wholesale gas services as well as gas storage. These businesses add earnings and cash flow volatility to Southern Gas' financial profile and detract from its credit quality.
For the 12-months ended 31 March 2020, Southern Gas exhibited improved credit metrics, with a ratio of cash flow from operations pre-working capital changes (CFO pre-W/C) to debt of 19.2%, including the proportional consolidation of the cash flow and debt associated with its 50% ownership interest in the Southern Natural Gas Company pipeline. The improvement was partially attributed to a strong performance by the wholesale gas services business, bonus depreciation on qualified regulated assets, and, to a lesser extent, tax refunds related to divestitures. Going forward, as Southern Gas continues its elevated capital investment program, particularly across its LDC utilities, which will be partially funded with additional debt, we expect that its financial profile will decline but still support its credit quality. We expect the company will generate a ratio of CFO pre-W/C to debt in the 15-16% range, including the proportional consolidation of the Southern Natural Gas Company pipeline.
The rapid spread of the coronavirus outbreak, severe global economic shock, low oil prices, and asset price volatility are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. We expect Southern Gas to be relatively resilient to recessionary pressures related to the coronavirus because of its rate regulated business model and regulatory cost recovery mechanisms. Nevertheless, we are watching for natural gas volume declines, utility bill payment delinquency, and the regulatory response to counter these effects on earnings and cash flow. As events related to the coronavirus continue, we are taking into consideration a wider range of potential outcomes, including more severe downside scenarios.
The effects of the pandemic could result in financial metrics that are weaker than expected; however, we see these issues as temporary and not reflective of the long-term financial profile or credit quality of Southern Gas.
As a predominantly natural gas distribution utility holding company, Southern Gas has a low carbon transition risk within the regulated utility sector. We view LDCs as having a lower level of carbon transition risk compared to vertically integrated electric utilities, mainly due to their lack of ownership of generation assets.
Social risks are primarily related to health and safety, demographic and societal trends, as well as customer relations as the company works to provide reliable and affordable service to customers and safe working conditions for employees. Regarding affordability, we see the potential for rising social risks associated with the coronavirus pandemic and its effect on Southern Gas' service territories, should unemployment remain high, making customers less able to absorb rate increases.
From a governance perspective, financial and risk management policies including a strong financial profile are important characteristics for managing environmental and social risks. Southern Gas' governance is based on its ultimate parent, Southern. We view the governance of Southern Gas as strong based on Southern's strong governance practices, including alignment with credit supportive benchmarks regarding ownership, control, compliance and reporting practices.
Southern Gas Capital's stable outlook reflects the predictable cash flow and relatively low business risk profile of guarantor Southern Gas' natural gas LDC subsidiaries as well as the diversity and credit supportiveness of its various regulatory environments. In addition, the outlook incorporates the higher risk profile of the company's non-utility businesses and our expectation that these operations will not grow materially and will be managed prudently. Furthermore, the outlook incorporates our expectation that Southern Gas will exhibit sustained credit metrics supportive of its credit profile, including a ratio of CFO pre-W/C to debt of in the 15-16% range.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Factors that could lead to an upgrade
An upgrade of Southern Gas Capital's ratings is unlikely while Southern Gas continues to execute its elevated capital investment program. The ratings could be upgraded if capital expenditures moderate requiring less debt issuance and there is a sustained improvement in key credit metrics, such that its CFO pre-W/C to debt is maintained above 19%.
Factors that could lead to a downgrade
Southern Gas Capital could be downgraded if the regulatory environments of Southern Gas deteriorate and do not, collectively, continue to provide credit supportive and timely cost recovery. Additionally, Southern Gas Capital could be downgraded if the risk and volatility of Southern Gas' unregulated businesses increase such that the company's cash flows become less stable and predictable, or if Southern Gas demonstrates a weakened financial profile, including a ratio of CFO pre-W/C to debt sustained below 15%. A downgrade would also likely result from any changes to the unconditional guarantee of Southern Gas Capital's debt by Southern Gas.
Headquartered in Atlanta, Georgia, Southern Gas Capital is a wholly owned finance subsidiary of Southern Gas (unrated), an intermediate holding company of The Southern Company, a large diversified, predominantly regulated utility holding company. Following the merger of AGL Resources with Southern on 1 July 2016, AGL Capital Corporation's name was changed to Southern Company Gas Capital and AGL Resources was renamed Southern Company Gas.
Southern Gas Capital is the financing vehicle for most of Southern Gas, issuing commercial paper, long-term debt securities and other financing instruments. Southern Gas unconditionally guarantees all of the debt and other obligations of Southern Gas Capital.
The largest segment of Southern Gas is its regulated gas distribution operations, consisting of four natural gas local distribution companies in Illinois, Georgia, Tennessee, and Virginia, which collectively serve over 4.3 million customers. The largest of these utilities are Northern Illinois Gas Company (A2 stable) and Atlanta Gas Light Company (unrated).
The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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Jeffrey F. Cassella VP - Senior Credit Officer Infrastructure Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Michael G. Haggarty Associate Managing Director Infrastructure Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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