Fitch Ratings has assigned a ‘BBB’ rating to Kinder Morgan Energy Partners, L.P.’s (KMP) proposed senior notes issuance. Net proceeds from the offering will be used to repay commercial paper (CP) and for general corporate purposes. KMP is currently on Rating Watch Negative following the announcement of an acquisition by Kinder Morgan Inc. (rated ‘BB+’; Rating Watch Positive by Fitch) of KMP. Fitch expects to consolidate KMP’s ratings with that of KMI and its affiliates at a ‘BBB-‘ Issuer-Default Rating and senior unsecured rating at or near merger close, including this proposed note offering.
Fitch placed KMP on Rating Watch Negative on Aug. 11, 2014 following the announcement that Kinder Morgan Inc. would acquire all of the outstanding equity securities of KMP, Kinder Morgan Management, LLC (KMR) and El Paso Pipeline Partners, L.P. (EPB). The deal is valued at roughly $70 billion including assumed debt at the operating subsidiaries. The Kinder Morgan companies will put in place cross guarantees among and between the Kinder Morgan entities (with limited exceptions) to be effective on closing of the transaction in order to create a single creditor class and eliminate structural subordination.
With the cross guarantees expected to extend from and to most of majority owned, Fitch-rated issuing entities within the Kinder Morgan family, Fitch expects to consolidate ratings at the
‘BBB-‘ level given the elevated leverage that the combined entities are targeting as a go forward run rate. The Rating Watch Negative reflects the cross guarantees and the high leverage at the consolidated entity.
The mergers are subject to regulatory approvals and a shareholder vote. Fitch will resolve the Rating Watches at or near merger completion expected in the fourth quarter of 2014 (4Q’14). Should the merger not close, Fitch expects to maintain the current ratings. A list of KMP’s ratings follows at the end of this release.
Key rating drivers
Guarantees Warrant Consolidated Approach: The cross guarantees are assumed to be absolute and unconditional between the entities and any refinancing of maturing notes will be done at the KMI level over time. With the cross guarantees expected to extend from and to several significant EBITDA-generating rated issuing entity within the Kinder Morgan family, Fitch expects the ultimate ratings will reflect a consolidated ratings approach which equalizes the outstanding ratings at the ratings level for KMI, which is expected at ‘BBB-/F3’.
High Leverage: Leverage at the consolidated entity will be high, with a targeted range of between 5.0x to 5.5x debt/EBITDA on a sustained basis. However, KMI’s asset size, scale and cash flow profile is relatively unique and much more indicative of an investment grade profile, offsetting concerns around the high leverage targets. Fitch expects that a combined KMI, as the largest midstream company and third largest energy company in the country, will have significant operational advantages and capital market access advantages as well as more than adequate liquidity.
Strong Asset Profile: The combined entity will continue be one of the largest and most important energy companies in the U.S. with significant positions in ‘must-run’ assets that support national energy infrastructure. KMI as a combined entity is currently the largest transporter of petroleum products in the nation and the largest transporter of natural gas. Its asset base touches all of the major supply and demand areas for oil, oil products, NGLs and natural gas in the country. The combined entity is expected to have an enterprise value in excess of $130 billion and over $8 billion in EBITDA. Over 90% of consolidated cash flows are currently fee based or hedged and this will remain the case for the combined entity (82% fee based; 94% fee base + hedged for 2014) providing comfort around cash flow and earnings stability.
Simplified Structure: The roll-up of entities into one single creditor class simplifies the corporate structure and provides meaningful benefits to KMI’s credit profile, in particular, by doing away with the structural subordination that limited KMI’s ratings to a notching below its operating subsidiaries.
Removal of Structural Subordination: The cross guarantees help to alleviate structural subordination at KMI. Dividends will be targeted at a 10% growth rate and the company should be able to retain excess cash to help fund part of its growth capital program, which was not practically possible at its MLPs given the increasing pressure to meet incentive distributions particularly at KMP which has long been in its 50/50 splits.
Potential future triggers for additional rating action may include:
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- A meaningful reduction in leverage, with debt/adjusted EBITDA between 4.5x – 5.0x on a sustained basis.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- A significant change in cash flow stability profile or current hedging practices. A move away from current significant majority of assets being fee based or hedged could lead to a negative ratings action.
- Failure to manage leverage to the stated 5.0x to 5.5x on a sustained basis. Fitch notes that leverage in near term will be slightly above 5.5x as several large scale construction projects get built but metrics are expected to be below 6.0x and are expected to improve to the target range as projects are completed.
Fitch currently rates KMP as follows:
Kinder Morgan Energy Partners, L.P. (KMP)
- IDR ‘BBB’;
- Unsecured debt ‘BBB’
- Short-term IDR ‘F2’;
- Commercial paper ‘F2’.
Additional information is available at ‘www.fitchratings.com’.
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