Fitch Affirms Kinder Morgan, Inc. at ‘BBB’; Outlook Stable
Fitch Ratings has affirmed Kinder Morgan, Inc.’s (KMI) and its guarantee-providing subsidiaries’ Long-Term Issuer Default Ratings (IDRs) and senior unsecured ratings at ‘BBB’. Additionally, Fitch has affirmed KMI’s Short-Term IDR and CP rating at ‘F2’. The Rating Outlook is Stable.
The rating is supported by KMI’s significant positions in must-run assets that comprise a meaningful percent of U.S. energy network infrastructure. Its biggest segment, Natural Gas Pipelines, benefits from long-term take-or-pay contracts, generating significant stable cashflow. The rating also reflects an expectation that Kinder will manage its leverage to its self-guided 4.5x net debt-to-EBITDA policy over the medium term.
KEY RATING DRIVERS
Beneficial Size and Scale: KMI is one of the largest midstream infrastructure companies in the U.S. and Canada, possessing a strong, diverse asset portfolio that 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).
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, more favorable capital market access and the ability to offer customers optionality and a variety of services. While the percentage of profit from take-or-pay (or similar revenue-assurance structures) activity varies as other contract-type divisions rise and fall with economic conditions, this percentage of take-or-pay is continually above 60% of EBITDA. All of these factors help provide cash flow stability, particularly in times of commodity price distress.
Recovery Progressing: KMI’s assets are well positioned, benefitting from the commodity tailwinds and economic resurgence. Volumes across its systems, except for jet fuel, are back to pre-COVID levels. It ended 2021 with a record high EBITDA, stemming largely from the non-recurring EBITDA earned during the February 2021 cold snap. Results through 1Q2022 are above budget. Fitch believes 2022 will see continued growth, supported by Fitch’s commodity price deck, but uncertainty in global economic conditions and the Russia-Ukraine conflict may skew outcomes in 2023 and 2024.
Low Customer Credit Risk: KMI’s long-distance pipelines have a high-quality customer credit profile. The February 2021 cold snap demonstrated the value of its system to KMI’s customer base (existing and potential). Despite having few contract renewals in the near term, the commodity tailwinds may furnish an opportunity for “high-grading” an already good customer list.
Capital Spending Ramps: Energy security concerns and a move away from Russian natural gas is driving growth in natural gas needed for new LNG plants in the Gulf coast region. KMI serves about 50% of the LNG facilities in the Gulf Coast and is well placed to provide additional service, driving capex higher, following a period of reduced spending during 2020-2021. Takeaway capacity out of the Permian basin is tightening. KMI announced open seasons for commitments for incremental capacity expansions on the Permian Highway Pipeline and Gulf Coast Express that will push out the need for a new greenfield pipeline to late 2024-2025. For new pipeline construction, Fitch expects KMI to target a high percentage of fixed fee revenue consistent with current and historical practices.
Stable Leverage: Fitch expects leverage to return to levels approaching management’s net leverage target of 4.5x, up from 4.1x in 2021 (under Fitch’s calculation of total debt with equity credit to operating EBITDA). The 2021 leverage reflects the non-recurring and high EBITDA generated during the February cold spell. Fitch believes that debt paydown in 2021 (about $1 billion) and funding its 2021 acquisitions (Stagecoach storage assets in the northeast and Kinetrek, a renewable natural gas company) from FCF will support near-term leverage levels that are lower than historic levels.
While capex will grow compared to the 2020-2021 levels, Fitch believes commodity tailwinds generate positive FCF. Capital allocation will follow the company’s established and measured dividend growth policy and an opportunistic, not programmatic, share buyback policy, in Fitch’s opinion, while maintaining leverage within management’s targeted 4.5x net leverage. Fitch forecasts for 2022 and 2023 that KMI will attain leverage levels of approximately 4.6x – 4.7x. The difference between Fitch-calculated gross leverage and management calculated net leverage generally ranges between 0.3x turns of leverage and 0.4x turns of leverage.
Parent Subsidiary Rating Linkages: There is parent subsidiary relationship between KMI and its rated subsidiaries. Fitch determines KMI’s standalone credit profile (SCP) based on consolidated metrics and considers the subsidiary pipelines to have a stronger SCP than KMI. Legal ring-fencing is considered to be open given the presence of absolute and unconditional cross guarantees between KMI and its rated subsidiaries. Access and control is deemed to be open given KMI’s 100% ownership interests in its rated subsidiaries and no formal policy related to funding. Most refinancing of maturing subsidiary notes is expected to be done at the KMI level over time (except some pipeline debt expected to remain at the pipelines for rate-making purposes with existing cross guarantees). Due to the aforementioned linkage considerations, Fitch rates KMI’s subsidiary pipelines on a consolidated basis and, as such, has assigned the same IDRs to both KMI and its subsidiary pipelines. Absent the cross guarantees, the subsidiary natural gas pipelines would likely be rated about one notch higher than the current ‘BBB’.
The Williams Companies, Inc. (WMB; BBB/Stable) is the top comparable for KMI, as both companies have a nationwide presence in long-haul pipelines, as well as material gathering and processing operations with E&P customers in multiple producing regions (on a variety of services, from well-head gathering down the chain to header pipelines). With respect to long-haul pipelines, another KMI peer is TC Energy Corporation (A-/Negative).
Both WMB and KMI have a nationwide presence when considering all segments of each company. Fitch regards KMI as having slightly less business risk than WMB, despite the presence of the CO2 segment, which does introduce some volatility and commodity price exposure into KMI’s earnings and cash flow. Fitch has long viewed KMI’s CO2 segment (which is 9% of total EBDA [management term] in the 2022 budget) through the lens of the company’s long-held, five-year programmatic laddered hedging program. KMI has more segmental diversity than WMB.
Fitch expects WMB to post total debt (gross) with equity credit to operating EBITDA of approximately 4.8x in FY22, somewhat higher than Fitch’s expectation for KMI (4.7x in 2022). Past 2022, WMB is expected to have lower leverage than KMI. The two companies are rated the same given that leverage and business risk offset each other; KMI has higher leverage but lower business risk. For both parameters, the difference between the two companies is small.
Fitch’s Key Assumptions Within the Rating Case for the Issuer
–The Fitch price deck for oil and natural gas informs the volume assumptions for certain segments, and, as to unhedged volumes, the price realization in the CO2 segment;
–Refined products volumes in the Products Pipelines segment reflects the Fitch Global Economic Outlook forecast for U.S. GDP growth of 3.5% in 2022;
–Continuation of recent dividend growth rate. Immaterial share re-purchases. Share repurchases done based on the company’s self-declared opportunistic share re-purchase strategy. Fitch expects that it will support the company’s long-term leverage policy target of 4.5x (as defined);
–2022 growth capital investment and investments for joint venture growth capex of approximately $1.3 billion.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
–A significant increase in the percentage of very long-term forecast EBITDA resulting from revenue assurance-type contracts and/or a decrease in the percentage of EBITDA resulting from revenues linked to commodity prices;
–Total debt with equity credit to operating EBITDA is forecast to be sustained below 4.0x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
–Total debt with equity credit to operating EBITDA is forecast to be at or above 5.0x;
–A leveraging acquisition;
–A change to the relative size and constitution of the business segments, which is expected to result in materially greater EBITDA volatility in the long term;
–A change in management financial policies and priorities that is expected to be adverse to credit quality.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Ample Liquidity: KMI’s liquidity is supported by its significant cash retention and availability under its revolving credit facility. The company’s primary sources of liquidity are cash from operations and its $4 billion revolving credit facility, which supports its $4 billion CP program. As of March 31, 2021, KMI had approximately $3.9 billion of liquidity consisting of approximately $84 million of cash and $3.8 billion of availability under the credit facility, net of letters of credit. KMI entered into a new $3.5 billion revolving credit facility in August 2021, maturing August 2026, and amended its existing facility, reducing the capacity to $500 million. The maturity date remains November 2023.
Manageable Maturity Schedule: KMI has approximately $2 billion-$3 billion of maturities through 2023. Management has indicated it intends to retire or refinance debt as it comes due utilizing its FCF, short-term borrowings or access to capital markets. Fitch believes that KMI will have bond market access and revolver availability to handle the maturities, and management’s stated goal of strengthening the balance sheet is consistent with its refinancings and debt retirements over the recent past.
Kinder Morgan is one of the largest energy infrastructure companies in North America. It owns the largest natural gas pipeline system in the U.S. The company operates in four segments: Natural Gas pipelines (62% of 2022 budgeted EBITDA), products pipelines (16%), terminals (13%) and CO2, or enhanced oil recovery (9%).
SUMMARY OF FINANCIAL ADJUSTMENTS
Fitch typically adjusts midstream energy companies’ EBITDA to exclude equity in earnings of unconsolidated affiliates but include cash distributions from unconsolidated affiliates. Fitch supplements this EBITDA in its leverage calculations with an ancillary leverage calculation, which is to include pro-rata EBITDA and pro-rata debt of levered joint ventures. Fitch removes distributions to non-controlling interests from KMI’s EBITDA. Leverage metrics are calculated based on gross debt, not debt of cash.
Source: Fitch Ratings