Fitch Affirms Kinder Morgan, Inc. and Subs. at 'BBB-'; Outlook Stable
The affirmations are reflective of KMI's 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.
Fitch believes that the issuance of $1.6 billion in preferred equity alleviates some of the uncertainty around KMI's ability and willingness to issue equity given current market weakness. Additionally, KMI recently expanded the range for its public distribution growth guidance for 2016, moving from 10% distribution growth for 2016 to a range of 6% to 10%. Fitch believes the wider guidance should allow KMI to maintain distribution coverage above 1.0x even as commodity prices continue to languish. The wider guidance and preferred offering should provide KMI a fair amount of balance sheet flexibility as it continues to work towards hitting previously stated leverage targets. Fitch continues to expect leverage at KMI on a consolidated basis will be high, above its targeted range of between 5.0x to 5.5x debt/EBITDA, for the next several years as KMI works through a high growth spending backlog. However, Fitch expects near term leverage to be below 6.0x and improve to the targeted range as projects are completed.
Today's ratings 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).
KEY RATING DRIVERS
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 access and delivers to all of the major supply and demand areas for oil, natural gas and natural gas liquids (NGLs). This helps generate significant stable cash flow, which somewhat offsets concerns around 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 optionality 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. Dividends remain targeted at a 6% to 10% growth rate from 2015 to 2016 and KMI is expected to retain excess cash to help fund part of its growth capital program, which was not practically possible at its master limited partnerships (MLPs) given the increasing pressure to meet incentive distributions, particularly at KMP which had long been in its 50/50 splits.
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 a targeted range of between 5.0x to 5.5x debt/EBITDA on a sustained basis and expected leverage above that target as KMI works through its planned growth spending. Relative to other similarly rated midstream entities, leverage (absent any consideration for size scale and asset quality) in the 5.0x to 5.5x debt/EBITDA range and EBITDA interest coverage in the 3.0x to 3.5x is more consistent with a sub-investment grade rating. However, KMI's asset size, scale and cash flow profile is relatively unique and much more reflective of an investment grade profile given the cash flow stability and general size and diversity of KMI's asset base, offsetting some of the concern around the high leverage targets.
Modest Commodity Price Exposure: Additional concern include 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 as KMI announced a $1 billion reduction in planned spending.
Adequate Cash Flow Generation: Fitch expects KMI to generate over $4.5 billion in free cash flow (FCF) before dividends and growth capex in 2015 growing as new projects get completed and come online. The majority of consolidated cash flows are currently fee-based or hedged, providing comfort as to cash flow and earnings stability. Fitch expects the consolidated entity to target a high percentage of fixed-fee or hedged revenue consistent with current and historical practices with a focus on maintaining distribution coverage above 1.0x.
KEY ASSUMPTIONS
--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-teen to 20% pre-tax returns on growth spending projects. Issuance of $1.6 billion in preferred equity in 2015 with 100% equity consideration.
--Dividend growth of 8% for 2016; 10% annually for outer years.
RATING SENSITIVITIES
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.
--Failure to manage leverage down towards the stated 5.0x to 5.5x and distribution coverage of 1.0x or greater on a sustained basis. Fitch notes that leverage in the near term will be slightly above 5.5x as several large scale construction projects get built, but metrics are expected to be below 6x and are expected to improve to the target range as projects are completed.
LIQUIDITY
Liquidity Adequate: On Sept. 19, 2014, KMI entered into a replacement revolving credit agreement providing for up to $4 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 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-';
--Short-term IDR at 'F3' and withdrawn;
--Commercial paper at 'F3' and withdrawn.
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-'.
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