DBRS Finalizes Provisional Rating of Kinder Morgan Cochin ULC at BBB (high)

DBRS Limited (DBRS) has today finalized its provisional Issuer Rating of Kinder Morgan Cochin ULC (KMU) at BBB (high) with a Stable trend. Following the assignment of the provisional rating on June 16, 2017, Kinder Morgan Canada Limited (KML), indirectly through its affiliates, closed $5.5 billion of secured credit facilities established to fund the $7.4 billion Trans Mountain Expansion Project (TMEP or the Project). KMU is the operating subsidiary of KML and is the borrower under the credit facilities. The credit facilities have a five-year term and are guaranteed by KML, Kinder Morgan Canada Limited Partnership and other operating subsidiaries comprising KML's business. KML was incorporated to own and operate Kinder Morgan Inc.’s (KMI) Canadian energy infrastructure assets, including the existing Trans Mountain Pipeline, TMEP, the Puget Sound pipeline, the Canadian portion of Cochin pipeline and various terminal, rail and storage facilities. KMI indirectly owns 70% of KML after the latter’s $1.75 billion initial public offering in May 2017.

KMU’s rating reflects the highly contracted nature of KMU’s fee-based business including, to a large extent, the 20-year take-or-pay contracts with a majority of investment-grade shippers covering 80% of the capacity underpinning TMEP. TMEP construction is expected to begin in Q3 2017 and the pipeline system is expected to be in full service by the end of 2019. Upon completion, the capacity of the pipeline system will increase to 890,000 barrels, from the current 300,000 barrels, with increased access to Canada’s west coast and U.S. Northwest markets. The existing Trans Mountain Pipeline that has been in operation since 1953 is the only liquids pipeline out of the Western Canadian Sedimentary Basin with access to the west coast tidewater. KMU is reasonably diversified with multiple competitive cash-generating assets.

DBRS notes that KMU’s financial risk profile is moderated by the construction risk for TMEP. Although oil and gas pipelines are generally considered to be of low to moderate risk in the degree of complexity of construction, DBRS recognizes that there are considerable execution risks associated with the 27-month scheduled construction period of the Project. In addition to the difficult terrain along sections of the pipeline route and fluctuating weather conditions, the Project could face political and environmental opposition despite federal and provincial approvals.

DBRS has considered the construction period and the operating period credit metrics in arriving at its final rating. In its rating assessment, DBRS has conservatively assumed a project delay of one year, 10% higher capital and operating costs and 80% utilization of the expanded pipeline capacity with no spot volumes. DBRS expects KMU’s cash flow-to-debt and debt-to-capital to be at approximately 15% and 60%, respectively, after the Project is in service for a full year. DBRS notes that the rating could be positively impacted should the Project be completed on time with no cost escalation. Significant cost escalation and schedule delays for the Project, beyond the assumptions made by DBRS, could pressure credit metrics and negatively impact the rating.

Notes:
All figures are in Canadian dollars unless otherwise noted.

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 to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on dbrs.com under Methodologies.