DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Notes and Debentures rating of Kinder Morgan, Inc. (KMI or the Company) at BBB. DBRS Morningstar concurrently confirmed the Medium-Term Notes & Unsecured Debentures rating of KMI’s wholly owned subsidiary, Kinder Morgan Energy Partners, L.P. (KMP), at BBB. All trends are Stable.
DBRS Morningstar expects that the weak oil prices and disruption in demand from the global Coronavirus Disease (COVID-19) pandemic will likely result in lower-than-expected operating cash flow and slightly higher leverage for KMI in 2020. KMI recently lowered its 2020 EBITDA guidance by 8% to $7.0 billion compared with 2019. In order to mitigate the impacts of the current market conditions and preserve cash, KMI scaled back its growth capital budget for 2020 by $700 million to $1.7 billion and reduced the previously planned 25% dividend increase to 5%, an additional saving of approximately $350 million. The Company continues to be committed to its self-funding model by funding its capital expenditures and dividends from internally generated cash flow and access the debt markets only for refinancing maturing debt. The length of time needed for a global economic recovery from the current crisis will likely determine the extent of credit deterioration for the Company.
DBRS Morningstar notes that KMI's fee-based contracted earnings, diversified portfolio of assets with a higher focus on natural gas transportation relative to oil and refined products, and presence in multiple basins lend support to the Company's cash flow generation capacity in these uncertain times. The Company’s assets are competitively positioned and connect major resource basins to demand centres and export markets. A majority of the Company's natural gas pipelines and terminal assets are covered by medium- to long-term take-or-pay contracts or minimum volume commitments. Natural gas prices have corrected modestly, albeit partly attributed to seasonality, compared with the weakness in oil prices resulting from the crisis. The power and industrial sectors, in addition to exports to Mexico and global liquefied natural gas exports, continue to drive natural gas demand. Although some degradation in associated gas volumes flowing on KMI's pipes is expected as oil production is scaled back in the Permian and Bakken basins, volumes on KMI's transmission and storage assets in the dry gas basins of Appalachia and Haynesville could be affected to a lesser degree. However, KMI is exposed to volume risk in its refined product transportation and gathering and processing activities. The Company's oil transportation and production operations in its CO2 segment entail commodity price risk, although partially mitigated in the short term through an active hedging program.
KMI’s counterparties are diverse, and re-contracting risk in the next two years is considered minimal. Approximately 76% of 2020 budgeted revenue is expected from counterparties that either are investment grade or have provided substantial credit support. However, the remaining counterparties are distributed evenly between non-investment-grade and nonrated entities. DBRS Morningstar notes that a prolonged weakness in oil and natural gas liquids prices could result in counterparty defaults or rating downgrades that could negatively affect KMI's business risk profile.
KMI has adequate liquidity from internal cash flow, its $4.0 billion five-year revolving credit facility, and its associated commercial paper program to execute capital commitments. Furthermore, the Company is in a better position to weather the current crisis as proceeds from asset sales were used to deleverage the balance sheet in 2019 and Q1 2020.
KMI and KMP have the same ratings because of the cross-guarantee agreement between the entities whereby each party to the agreement has unconditionally guaranteed, jointly and severally, the payment of specified indebtedness of the other party to the agreement.
DBRS Morningstar considers a positive rating action to be unlikely in the next year given the uncertainty surrounding the pandemic and the timing of a global economic recovery. KMI’s ratings could come under pressure if operating cash flow-to-debt weakens to a level that is inconsistent with the BBB ratings, counterparty risk rises, or a higher-than-expected exposure to commodity and volume risk results from the current crisis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (November 26, 2019); DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019); and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at firstname.lastname@example.org.
This rating was not initiated at the request of the rated entity.
The rated entity or its related entities did not participate in the rating process for this rating action. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is an unsolicited credit rating.
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