DBRS Places Ratings of Kinder Morgan Canada Limited and Kinder Morgan Cochin ULC Under Review with Negative Implications

DBRS Limited (DBRS) placed the following ratings Under Review with Negative Implications:

-- Kinder Morgan Canada Limited (KML), Preferred Shares – Cumulative rating of Pfd-3 (high)
-- Kinder Morgan Cochin ULC (KMU), Issuer Rating of BBB (high)

The rating action follows the announcement by KML’s board that the Government of Canada (Rated AAA with Stable trend by DBRS) has agreed to purchase the existing Trans Mountain Pipeline System and the $7.4 billion Trans Mountain Expansion Project (TMEP) for $4.5 billion. As part of the agreement, the Government of Canada has agreed to fund the resumption of TMEP planning and construction work by guaranteeing TMEP’s expenditures under a separate federal government recourse credit facility until the transaction closes. The parties expect to close the transaction by late Q3 2018 or early Q4 2018, subject to KML shareholder and applicable regulatory approvals.

Houston-based Kinder Morgan Inc. (KMI, rated BBB (low) with Stable trend by DBRS) indirectly owns 70% of KML. KML’s Preferred Shares – Cumulative rating is based on the credit profile of KMU. KMU is KML’s operating subsidiary (collectively, the Company), which operates Canadian energy infrastructure assets, including the existing Trans Mountain Pipeline, TMEP, the Puget Sound pipeline and the Canadian portion of the Cochin pipeline as well as various terminal, rail and storage facilities. 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. The 300,000 barrels per day Trans Mountain Pipeline is rate-regulated under a cost-of-service model and is the only pipeline in Canada transporting crude oil and refined products to the west coast of Canada.

DBRS’s view is that, following the sale of the Trans Mountain Pipeline System and TMEP to the Government of Canada, KMU’s residual assets may not be supportive of the BBB (high) rating. The Company will continue to operate an integrated network of crude oil tank storage and rail terminals in Alberta; the Vancouver Wharves Terminal, a mineral concentrate export/import facility; and the Canadian portion of the Cochin Pipeline system, which transports light condensate originating from the United States to Fort Saskatchewan. Although the TMEP project overhang and legal risks are removed for the Company, the remaining assets have a relatively weaker credit profile compared with the assets being sold. The existing assets are contractually supported, but they lack the scale, diversification and the rate-regulated underpinnings that the Company had prior to the sale. Furthermore, the contract duration for the remaining assets are shorter, with a mix of investment grade and non-investment counterparties. DBRS notes that the Company had minimal debt at Q1 2018 and the capital expenditure requirements going forward are expected to be reasonable.

KML expects its approximately 30% share of after-tax proceeds of the sale to be $1.25 billion, but has not articulated how its share of the proceeds will be utilized. KML expects the remaining assets to generate EBITDA of approximately $200 million in 2018, nearly half of the EBITDA from its existing assets. DBRS will further review information as it becomes available and at the close of the sale transaction, with a view to assess the impact on the ratings.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.