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Kinder Morgan (KMI) Ratings Affirmed by Moody's Following Conv. Preferred Issuance

October 28, 2015 10:38 AM EDT

Moody's Investors Service, ("Moody's") affirmed Kinder Morgan Inc.'s (KMI) (NYSE: KMI) Baa3 senior unsecured and Prime-3 commercial paper ratings. The rating outlook remains stable. A complete list of Moody's rating actions is below. The affirmation follows KMI's announced intention to issue $1.6 billion of mandatorily convertible preferred shares, which Moody's treats as equity.

"Kinder Morgan's issuance of mandatorily convertible preferred shares will help the company achieve their year-end 2015 target leverage of 5.6X," said Terry Marshall, Moody's Senior Vice-President. "However, by mid-2016, after our standard adjustments, Moody's expects leverage will be close to 6X as the company debt funds growth capex, with additional equity issuance not expected until mid-2016."

Outlook Actions:

..Issuer: Colorado Interstate Gas Company

....Outlook, Remains Stable

..Issuer: Copano Energy, LLC

....Outlook, Remains Stable

..Issuer: El Paso CGP Company

....Outlook, Remains Stable

..Issuer: El Paso Energy Capital Trust I

....Outlook, Remains Stable

..Issuer: El Paso Natural Gas Company

....Outlook, Remains Stable

..Issuer: El Paso Pipeline Partners Operating Company

....Outlook, Remains Stable

..Issuer: El Paso Tennessee Pipeline Co.

....Outlook, Remains Stable

..Issuer: Hiland Partners, LP

....Outlook, Remains Stable

..Issuer: K N Capital Trust I

....Outlook, Remains Stable

..Issuer: K N Capital Trust III

....Outlook, Remains Stable

..Issuer: Kinder Morgan Energy Partners, L.P.

....Outlook, Remains Stable

..Issuer: Kinder Morgan Finance Company, LLC

....Outlook, Remains Stable

..Issuer: Kinder Morgan G.P., Inc.

....Outlook, Remains Stable

..Issuer: Kinder Morgan Inc.

....Outlook, Remains Stable

..Issuer: Southern Natural Gas Company

....Outlook, Remains Stable

..Issuer: Tennessee Gas Pipeline Company

....Outlook, Remains Stable

Affirmations:

..Issuer: Colorado Interstate Gas Company

....Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed Baa3

..Issuer: Copano Energy, LLC

....Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed Baa3

..Issuer: El Paso CGP Company

....Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed Baa3

..Issuer: El Paso Energy Capital Trust I

....Pref. Stock Preferred Stock (Local Currency), Affirmed Ba1

..Issuer: El Paso Holdco LLC (Assumed by Kinder Morgan Inc)

....Subordinate Conv./Exch. Bond/Debenture (Local Currency), Affirmed Ba1

....Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed Baa3

..Issuer: El Paso Natural Gas Company

....Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed Baa3

..Issuer: El Paso Pipeline Partners Operating Company

....Backed Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed Baa3

..Issuer: El Paso Tennessee Pipeline Co.

....Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed Baa3

..Issuer: Hiland Partners, LP

....Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed Baa3

..Issuer: K N Capital Trust I

....Backed Pref. Stock Preferred Stock (Local Currency), Affirmed Ba1

..Issuer: K N Capital Trust III

....Backed Pref. Stock Preferred Stock (Local Currency, Affirmed Ba1

..Issuer: Kinder Morgan Energy Partners, L.P.

....Backed Senior Unsecured Shelf (Local Currency), Affirmed (P)Baa3

....Backed Subordinate Shelf (Local Currency), Affirmed (P)Ba1

....Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed Baa3

..Issuer: Kinder Morgan Finance Company, LLC (Assumed by Kinder Morgan Inc.)

....Backed Senior Secured Regular Bond/Debenture (Local Currency), Affirmed Baa3

..Issuer: Kinder Morgan G.P., Inc.

....Pref. Stock Preferred Stock (Local Currency) Affirmed Ba2

..Issuer: Kinder Morgan Inc.

....Multiple Seniority Shelf (Local Currency), Affirmed (P)Baa3

....Senior Unsecured Commercial Paper (Local Currency), Affirmed P-3

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

..Issuer: Kinder Morgan Kansas Inc. (Assumed by Kinder Morgan Inc)

....Junior Subordinated Regular Bond/Debenture (Local Currency), Affirmed Ba1

....Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed Baa3

..Issuer: Sonat Inc. (Assumed by Kind Morgan Inc.)

....Backed Senior Secured Regular Bond/Debenture (Local Currency), Affirmed Baa3

..Issuer: Southern Natural Gas Company

....Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed Baa3

..Issuer: Tennessee Gas Pipeline Company

....Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed Baa3

RATING RATIONALE

KMI's Baa3 rating reflects its significant scale, high quality assets, and fee-based cash flows, tempered by its high leverage and payout of approximately 90% of internally generated cash flow to shareholders. Moody's forecasted leverage for KMI of nearly 6x in mid-2016 (including Moody's adjustments which increase Kinder Morgan's measurement by about 0.2x) is high for an investment grade company. The company's year-end leverage focus means leverage may be above its target for much of the year, and it crucially relies on ongoing equity capital markets access to meet that target. KMI benefits from relatively stable cash flow generated by a combination of long term contracts and regulated returns from energy infrastructure assets. We estimate that only about 10% of the company's operating cash flow is subject to short-term market volatility, primarily related to oil production tied to the CO2 business segment, which we expect to remain weak through 2016 due to commodity prices.

We expect leverage to remain high as the company plans to distribute most of its ~$5 billion of operating cash flow to shareholders. KMI is reliant on both equity and debt markets to fund growth capital expenditures, which will likely exceed $4 billion next year, which in turn supports the company's distributable cash flow growth expectations of 6-10%.

As part of the November 2014 re-organization, a cross-guarantee was executed by most of the domestic, wholly-owned subsidiaries of KMI, leading to the Baa3 rating for all of the included entities. Four rated entities are not part of the cross-guarantee group. Three of these entities have issued preferred stock that is rated Ba1: El Paso Energy Capital Trust I, KN Capital Trust I, and KN Capital Trust III. The sole asset of each is subordinated debt of KMI, which was funded by the rated preferred stock, which is the principal liability of each entity. The preferred stock issued by these entities is rated one notch lower than KMI at Ba1, reflecting the credit quality of the subordinated payment obligation of KMI that supports the preferreds. The fourth non-cross guaranteed entity is Kinder Morgan GP Inc., which issued preferred stock that is rated Ba2. This entity has ownership interests that generate about $100 million of annual distributable cash flow and the preferreds have a preferential right to dividends over KMI's common shareholder. The preferreds are rated two notches below KMI's senior unsecured rating at Ba2.

KMI's liquidity is adequate. Through the third quarter of 2016 Moody's expects the company will have nearly $11 billion of cash from operations and liquidity resources to fund about the same amount of dividends, capital expenditures and debt maturities. The company will have about $5 billion of cash from operations, together with pro-forma cash of $1.7 billion and an essentially unused credit facility of $4 billion (expires 2019). We expect dividends in the mid-$4 billion range, capital expenditures around $4.5 billion, and debt maturities in Q4 2015 and Q1 2016 totaling $2.4 billion. We also expect KMI to be in compliance with its sole financial covenant (consolidated total debt to consolidated EBITDA not greater than 6.5x).

The stable outlook reflects large asset base and primarily contacted revenue base.

The ratings could be downgraded if it appears that debt to EBITDA will not decline towards the company's 5.5x leverage target, if distribution coverage appears likely to fall below 1x or if the company undertakes a material acquisition that leaves the company's leverage target highly dependent on subsequent equity capital markets access.

The rating could be upgraded if Moody's adjusted debt to EBITDA appears to be sustainable below 5.0x.



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