Crude Oil ( ) Brent Crude ( ) Natural Gas ( ) S&P 500 ( ) PHLX Oil ( )
 December 9, 2015 - 10:29 AM EST
Print Email Article Font Down Font Up
Fitch Affirms Kinder Morgan, Inc. and subs. at 'BBB-'; Outlook Stable

Fitch Ratings has affirmed its 'BBB-' Issuer Default Rating (IDR) and senior unsecured ratings on Kinder Morgan, Inc. (KMI) and its subsidiaries, following KMI's announcement of its change in dividend policy. KMI will cut its dividend to focus on retaining cash to help stabilize its balance sheet and fund what remains a robust capital spending backlog. Additionally, Fitch has affirmed its 'F3' short-term IDR and commercial paper (CP) rating on KMI. A full list of rating actions is available at the end of this release.

The Rating Outlook is Stable.

The affirmations are reflective of the change in dividend policy reducing the need for KMI to access what has been a rather unforgiving equity market. The dividend cut helps clear up the uncertainty surrounding KMI's ability to fund its large growth-spending backlog while maintaining its intent to lower leverage to the 5.0x to 5.5x range. The dividend cut represents a new strategic direction for KMI, which has historically paid nearly all of its internally generated cash flow to its equity investors. The shift in financial policy will allow KMI to generate significant free cash flow to help fund growth capital spending. Fitch continues to expect near-term leverage at KMI on a consolidated basis to be high, with the company projecting 2016 5.5x net debt/EBITDA, which is largely in line with expectations. Fitch believes the dividend cut will help mitigate the risks as to KMI's ability to raise external capital without further stressing its balance sheet. The increase in retained cash flow is expected to cover all of KMI's equity and most of its debt needs for the foreseeable future.

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.

Today's rating actions reflect Fitch's consolidated ratings approach to KMI and its various subsidiaries subject to the cross-guarantee agreements among and between the Kinder Morgan entities. The cross guarantees are joint and several, absolute and unconditional, between the entities, and any refinancing of maturing notes is expected be done primarily at the KMI level over time (excepting some pipeline debt which would remain at the pipelines for rate-making purposes but remain cross guaranteed).


Beneficial Size & Scale: KMI is currently the largest midstream infrastructure company in the U.S., possessing a strong, diverse asset portfolio which spans multiple business lines and accesses and delivers to all of the major supply and demand areas for oil, natural gas and NGLs. This helps generate significant stable cash flow, which somewhat offsets concerns about high leverage. The midstream business remains one where size and scale are key differentiating credit factors, as they typically provide earnings and business line diversity, reduced single counterparty exposure, economies of scale, and the ability to offer customers options and a variety of services. All of these factors help provide cash flow stability, particularly in times of commodity price distress.

Simplified Structure/Structural Equivalence: KMI's November 2014 roll-up of entities into one single creditor class has simplified the corporate structure and provides benefits to KMI's credit profile, in particular by eliminating the structural subordination that limited KMI's ratings to a notching below its operating subsidiaries. Virtually all of the operating cash flow is now available to KMI to fund operations, reduce debt and/or pay dividends, alleviating most structural subordination at KMI. With the dividend cut KMI is now expected to retain excess cash to help fund its growth capital program.

Guarantees Warrant Consolidated Approach: The cross guarantees are absolute and unconditional between the entities, and any refinancing of maturing notes is expected to be done at the KMI level over time. KMI's rating reflects the removal of the structural subordination, as well as the strong cash flow and operating diversity of its asset base.

High Leverage: Leverage at the consolidated entity is high with KMI expecting 2016 leverage of 5.5x net debt/EBITDA, though this number improves as KMI works through its planned growth spending. Offsetting any concerns around high leverage through the construction cycle is the strength of KMI's asset size, scale and cash flow profile, and expectations for the cash that previously would have gone towards the dividend will now be used to fund growth capital.

Modest Commodity Price Exposure: An additional concern is KMI's exposure to languishing commodity prices through its CO2 business which, though substantially hedged near term, continues to be negatively impacted by low commodity prices. KMI's exposure to commodity prices through its CO2 business is expected to increase as higher priced hedges continue to roll off. Fitch expects continued commodity price weakness to weigh on KMI's ability to enter into hedges at reasonable levels, which will put a drag on earnings and cash flow. Spending at the CO2 business is expected to be lower in 2016 as KMI had previously announced a $1 billion capex reduction.


--Crude oil, natural gas, and NGL prices at or near current forward strip pricing.

--Growth capital spending of $21.3 billion over the next 4-5 years with balanced funding of growth capital spending and acquisitions with a focus on maintaining public debt/EBITDA targets of 5.0x to 5.5x. Modest mid-teens to 20% pre-tax returns on growth-spending projects.


Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--A meaningful reduction in leverage, with debt/adjusted EBITDA between 4.5x and 5.0x on a sustained basis.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--A significant change in cash flow stability profile or current hedging practices. A move away from current significant majority of assets being fee based or hedged could lead to a negative ratings action.

--Leverage significantly above 5.5x on a sustained basis. With the cut in dividend, Fitch now expects leverage in 2016 at 5.5x, improving slightly in 2017 and 2018.


Liquidity Adequate: On Sept. 19, 2014, KMI entered into a replacement revolving credit agreement providing for up to $4.0 billion in revolving credit capacity, with a $1 billion accordion feature which matures in 2019. The credit facility contains a financial covenant providing for a maximum debt-to-EBITDA ratio of 6.50x through December 2017, 6.25x from Dec. 31, 2017 through Dec. 31, 2018 and 6.0x thereafter. As of Sept. 30, 2015, KMI had $3.4 billion in availability under its credit revolver and was in compliance with its covenants.

Fitch has affirmed the following ratings with a Stable Outlook:

Kinder Morgan, Inc. (KMI)

--IDR at 'BBB-';

--Unsecured notes and debentures at 'BBB-';

--Unsecured revolving credit facility at 'BBB-';

--Short-term IDR at 'F3';

--Commercial paper at 'F3'.

Kinder Morgan Finance Company, LLC

--Unsecured notes at 'BBB-'.

KN Capital Trust I

--Trust preferred at 'BB'.

KN Capital Trust III

--Trust preferred at 'BB'.

El Paso Energy Capital Trust I

--Trust preferred at 'BB'.

Kinder Morgan Energy Partners, L.P. (KMP)

--IDR at 'BBB-';

--Unsecured debt at 'BBB-';

Tennessee Gas Pipeline Company, LLC

--IDR at 'BBB-';

--Senior unsecured debt at 'BBB-'.

El Paso Natural Gas Company, LLC

--IDR at 'BBB-';

--Senior unsecured debt at 'BBB-'.

El Paso Pipeline Partners Operating Co., LLC (EPO)

--IDR at 'BBB-';

--Senior unsecured debt at 'BBB-'.

Colorado Interstate Gas Company, LLC

--IDR at 'BBB-';

--Senior unsecured debt at 'BBB-'.

Southern Natural Gas Company, LLC

--IDR at 'BBB-';

--Senior unsecured debt at 'BBB-'.

Additional information is available on

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

Solicitation Status

Endorsement Policy

Fitch Ratings
Primary Analyst
Peter Molica
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Secondary Analyst
Kathleen Connelly
Committee Chairperson
Mark C. Sadeghian, CFA
Senior Director
Media Relations:
Alyssa Castelli, +1 212-908-0540

Source: Business Wire (December 9, 2015 - 10:29 AM EST)

News by QuoteMedia