DBRS Downgrades Kinder Morgan Canada Limited and Kinder Morgan Cochin ULCEnergy
DBRS Limited (DBRS) downgraded the Issuer Rating of Kinder Morgan Cochin ULC (KMU) to BBB from BBB (high) and the Preferred Shares - Cumulative rating of Kinder Morgan Canada Limited (KML or the Company) to Pfd-3 from Pfd-3 (high). Trends on the ratings are now Stable. The downgrades remove the ratings from Under Review with Negative Implications, where they were placed following the announcement by KML’s board of directors that the Government of Canada (rated AAA with a Stable trend by DBRS) agreed to purchase the Trans Mountain Asset Group (TMAG) comprising the Trans Mountain Pipeline, along with its associated Puget Sound Pipeline and the Trans Mountain Expansion Project (TMEP), for $4.5 billion (for more information, please refer to the following DBRS press releases: “DBRS Places Ratings of Kinder Morgan Canada Limited and Kinder Morgan Cochin ULC Under Review with Negative Implications” dated May 31, 2018; and “DBRS Comments on Kinder Morgan Canada Limited’s Proposed Return of Capital to Shareholders” dated September 7, 2018).
DBRS notes that subsequent to the sale of TMAG, the TMEP overhang and legal risks are removed for the Company, however, the remaining assets have a relatively weaker credit profile compared with the assets sold, resulting in the downgrades.
Kinder Morgan, Inc. (KMI; rated BBB (low) with a Stable trend by DBRS) indirectly holds an approximate 70% economic interest in KML, with the balance held by public shareholders. The Preferred Shares - Cumulative rating of KML, which owns 100% of its operating subsidiary KMU and holds no other material assets, is based on the strength of KMU and the expectation that no debt will be issued by KML. Any change in KMU’s rating could affect KML’s rating. KMU operates an integrated network of crude oil tank storage and rail terminals in Alberta; the Vancouver Wharves Terminal, a dry dock mineral concentrate export/import facility; and the Canadian portion of the Cochin Pipeline System, which transports light condensate from the United States to Fort Saskatchewan. The assets primarily operate on take-or-pay contracts, with an average remaining contract life of approximately four years for the Company’s storage and rail terminal assets, three years for the Vancouver Wharves Terminal and approximately five years for the Cochin pipeline, with no direct commodity risk. Although the existing assets are contractually supported, they lack the diversification, scale, rate-regulated underpinnings and contract durations that the Company had prior to the sale of TMAG.
The approximate $4.3 billion of proceeds from the sale of TMAG was used to make a special distribution of approximately $4.0 billion to shareholders on January 3, 2019; $1.2 billion to restricted voting shareholders of KML and $2.8 billion payable to KMI. The Company also completed a one-for-three reverse stock split that was approved earlier at the shareholders' meeting on November 29, 2018. KML does not anticipate the special distribution or reverse stock split to have any impact on the preferred shares of KML or dividends payable thereon.
The Company is reviewing its strategic options which include: (1) continuing to operate as a standalone enterprise; (2) an outright sale of the Company; or (3) a strategic combination with another company, including KMI, with the expectation of providing further updates by April 2019.
KML has strong financial metrics and no material debt. DBRS treats 25% of KML’s preferred shares outstanding and preferred shares in excess of 10% of total capitalization as debt in calculating credit metrics. DBRS expects the Company to generate approximately $200 million to $220 million of EBITDA for 2019. The capital expenditure (capex) requirements for 2019 are minimal and the Company expects to fund its dividends and capex needs with internally generated cash flow. Pending the outcome of KML’s strategic review, DBRS expects the ratings to remain at the current level. However, the ratings could be pressured should the outcome of the strategic review weaken the Company’s business risk profile or financial metrics weaken to the mid-range of the DBRS BBB rating category.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry, DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on dbrs.com under Methodologies & Criteria.
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The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
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