Kinder Morgan Inc. (NYSE: KMI) is one of the most widely followed energy-related companies in America. The former master limited partnership (MLP) has run into an energy sector crunch since converting back to a corporation, and now there is often less enthusiasm and more caution on behalf of many investors and analysts. So how will investors react when they see that the credit ratings agency Moody’s changed Kinder Morgan’s outlook to Negative from Stable?
Many credit ratings reviews are for show. What stands out here is that Moody’s said that approximately $44 billion of rated debt is affected by the outlook change. Before getting too deeply into what Moody’s has said in its credit action, note that the other two key credit ratings agencies (Fitch and S&P) have not taken this same stance (see below) in their views and reactions.
Kinder Morgan is extremely active in daily volume, it is still owned heavily by many MLP investors, and it is heavily owned by MLP closed-end funds that track the sector. This company is the largest midstream energy company in the North America via a vast network of product pipelines, natural gas pipelines, terminals and production and transportation assets.
Moody’s Investors Service did affirm Kinder Morgan’s Baa3 senior unsecured and Prime-3 commercial paper ratings. What matters here is that Baa3 is the last line of investment grade. If Kinder Morgan gets a credit rating downgrade, that means that at least some of its credit ratings may no longer be investment grade.
One of the first things mentioned here in Moody’s credit rating review was that the company announced on November 30 an agreement to increase its ownership in Natural Gas Pipeline Company of America (NGPL) to 50% from 20% for approximately $136 million. Brookfield Infrastructure Partners L.P. (NYSE: BIP) will own the remaining 50%. Moody’s showed that the proportionate consolidation of NGPL’s debt will add about $1.5 billion to Kinder Morgan’s consolidated debt, while NGPL’s trailing 12-month gross EBITDA was $273 million. The transaction valued NGPL at a total enterprise value of $3.4 billion, inclusive of existing debt.
So, what about those other calls? Fitch and S&P ratings data are as follows:
- Fitch Ratings expects the announced acquisition of a 30% interest of Natural Gas Pipeline Company of America LLC (NGPL) to be neutral to Kinder Morgan Inc. (KMI; ‘BBB-‘/Stable Outlook).
- Standard & Poor’s Ratings Services said today that the rating and outlook on Kinder Morgan are unaffected after the company announced a definitive agreement to increase its ownership interest in NGPL to 50% from 20%. … KMI’s investment in NGPL does not change our view of the company’s expected credit measures…
The negative outlook reflects Kinder Morgan’s increased business risk profile and additional pressure on its already high leverage that will result from its agreement to increase ownership in NGPL, a distressed company. NGPL is facing potential default on its pending interest payments, suggesting that KMI will need to provide cash injections, which will likely be debt funded initially.
Additional assumptions, for potential improvements or downgrades, were listed by Moody’s as follows:
The negative outlook could be restored to stable if KMI appears likely to have consistent Moody’s adjusted debt to EBITDA of 5.8x or below.
The ratings could be downgraded if it appears that Moody’s adjusted debt to EBITDA will not be consistently 5.8x or below, distribution coverage appears likely to fall below 1x, business risk increases or if the company undertakes an acquisition that increases leverage or does other debt financed activities where the company is highly reliant on equity markets to bring down leverage. The rating could be upgraded if Moody’s adjusted debt to EBITDA appears to be sustainable below 5.0x.
What may matter to some investors is that Moody’s is calling NGPL’s capital structure untenable in its ratings rationale. Its debt/EBITDA was said to be currently above 10, and it was noted that there is insufficient liquidity to fully fund pending interest payments and term loan amortization totaling $115 million. The group said:
Moody’s expects that KMI is likely to initially debt fund its share of the needed support, and will need to provide additional support as part of any restructuring of NGPL’s capital structure and its approximate $3 billion of debt. Proportionate consolidation of NGPL along with Moody’s standard adjustments will increase KMI’s leverage to around 5.9x on a December 31, 2015 pro forma basis.