MOODY'S LOWERS SENIOR DEBT RATINGS OF SONAT INC. AND SOUTHERN NATURAL GAS COMPANY; SONAT INC. TO Baa1
Moody's Investors Service lowered the senior debt ratings of Sonat Inc. to Baa1 from A3, the ratings of Southern Natural Gas Company (SNG) to A3 from A2, and the Savannah Port Industrial Revenue Bonds backed by Southern LNG Inc., a subsidiary of SNG, to A3 from A2. Sonat's Prime-2 rating for commercial paper was not under review and is unchanged. The rating reduction reflects Moody's view that Sonat's risk profile has increased due mainly to the impact of a low oil and natural gas price environment on the activities of its subsidiary, Sonat Exploration, which is increasing its focus on exploratory drilling. Moody's also assigned negative outlooks to the ratings, based on medium term expectations of lower debt coverage measures relative to peer companies.
Ratings lowered are:
Sonat Inc. - A3 senior unsecured debt to Baa1; A3 bank revolver to Baa1; (P)A3 shelf registration for senior debt to (P)Baa1.
Southern Natural Gas Company - A2 senior unsecured debt to A3; (P)A2 shelf registration for senior debt to (P)A3.
Savannah, GA IRB, backed by Southern LNG(sub. of Southern Natural Gas Company) -- A2 to A3.
Sonat Exploration restructured its exploration and production business during 1998 and in the process increased the exploratory drilling focus of the program. Also, because of relatively high capital expenditures during 1998, and certain write-downs and adjustments to equity because of the restructuring, consolidated debt leverage increased sharply. In 1999, as the result of reduced production (because of 1998 reserve sales) and continued low commodity prices, we expect the subsidiary's cash flow to be reduced from 1998 levels; we expect that capex will also be reduced.
The company's consolidated debt to capital at September 30, 1998 was 57%, well above Sonat's historical debt levels. Other debt protection ratios have also deteriorated. Furthermore, Sonat, which now uses the full cost accounting method, will be more exposed than some other e&p companies to a write-down based on low commodity prices.
Moody's notes, however, that Sonat's cash flows have been less impacted than many e&p companies since its production is primarily natural gas, which has decreased less than oil. Also, the parent company will likely receive some cash flow support in the future from its gas pipeline subsidiary, Southern Natural Gas Company, whose capital spending needs will reduce in the intermediate term. SNG has been performing very well but its dividends to the parent have been recently constrained by its own relatively high capital expenditures.
Sonat Inc. is a diversified natural gas transmission company with subsidiaries operating in natural gas transmission, gas and oil exploration and production, and energy marketing. Sonat is headquartered in Birmingham, Alabama.
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