Deal for AGL comes at time of increasing ‘risk profile’ for Southern, Moody’s finds

Moody’s affirms Southern ratings, but changes outlook to negative

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With Southern Co. announcing plans to buy natural gas firm AGL Resources, Moody’s Investors Service affirmed the Southern rating for commercial paper, but changed its outlook to “negative” on the utility holding company.

Southern announced plans Aug. 24 to buy AGL, a natural gas distributor that owns a stake in three major new pipelines being developed in the Eastern United States.

But the proposed AGL purchase would come at a time when some Southern utilities are already incurring a growing level of debt for major infrastructure projects.

The AGL acquisition comes at a time when Southern's risk profile has been increasing and its relative position at the Baa1 rating level already weakening as a result of cost increases and schedule delays at the Vogtle new nuclear plant being built by its largest utility unit, Georgia Power, Moody’s said Aug. 24.

“Southern's credit quality has also been pressured by about $2 billion of pre-tax ($1.2 billion after-tax) charges taken for unrecoverable costs at the Kemper IGCC plant being built by Mississippi Power,” Moody’s said.

Southern is also providing significant liquidity to Mississippi Power through intercompany loans to the utility. Finally, Southern has been supporting the expansion of wholesale power unit Southern Power into renewable energy through some parent company debt financing, the ratings firm said.

The negative rating outlook on Southern is prompted by today's announcement that it has agreed to acquire AGL Resources Inc. (AGL, unrated), an Atlanta based natural gas distribution company, for about $8 billion in cash" said Moody’s Associate Managing Director Michael G. Haggarty.

"The transaction will result in a significant increase in debt at the Southern holding company level at a time when holding company debt has already been increasing, partly to support funding needs at utility unit Mississippi Power and portfolio growth at wholesale power company Southern Power" added Haggarty.

Moreover, in AGL, Southern is acquiring an entity's whose financing unit, AGL Capital Corp. (guaranteed by AGL), is rated Baa1, lower than three of Southern's four existing utility units, Moody’s went on to say.

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