Fitch Ratings has assigned a 'BBB' rating to Kinder Morgan Inc.'s (KMI) proposed issuance of senior unsecured notes.

Proceeds from the offering will be used for general corporate purposes, including commercial paper (CP) repayment and refinancing of upcoming maturities, including CP borrowings incurred to finance the acquisition of STX Midstream. The Rating Outlook is Stable.

The rating is supported by KMI's significant positions in must-run assets that comprise a meaningful percent of U.S. energy network infrastructure. Its biggest segment, Natural Gas Pipelines, benefits from long-term take-or-pay contracts, generating significant stable cashflow. The rating also reflects Fitch's expectation that Kinder will manage its leverage to its target 4.5x net debt-to-EBITDA policy over the medium term while managing shareholder returns.

Key Rating Drivers

Largely Fixed-Fee-Based, Mostly Take-or-Pay: KMI generates roughly 60%-65% of total segment EBDA (management term) from take-or-pay-type contracts. A further approximately 25% comes from fixed-fee but volume-exposed arrangements. KMI adheres to a five-year laddered hedging plan for directly commodity-price-exposed businesses. Collectively these provide a level of cashflow stability that is supportive of KMI's credit profile.

KMI's Federal Energy Regulatory Commission (FERC)-regulated pipeline subsidiaries have a shorter relative weighted-average remaining contract life than its peers. However, these pipes have peak day utilization rates that largely are at or near capacity and high average utilization levels overall. Fitch expects KMI to renew contracts for reasonably long tenures at supportive rates determined by the FERC, including a healthy rate of return, or at rates negotiated with shippers.

Size Matters: Size and scale are key credit factors for the midstream sector and KMI is one of the largest midstream infrastructure companies in North America. The company has a strong, diverse asset portfolio that spans multiple business lines and accesses and delivers to all major supply and demand areas for oil, natural gas and refined products.

While the percentage of profit from take-or-pay activity varies as revenue generation moves with economic conditions, it remains consistently above 60% of EBITDA. All of these factors help stabilize cashflow, particularly in times of commodity price distress.

Positive Volume Momentum: KMI has assets that are well positioned to benefit from commodity price tailwinds and secular trends including energy transition and energy security. Natural gas volumes across its systems have strongly trended upward from 2020 troughs. KMI's natural gas pipeline systems connect to various liquefied natural gas (LNG) export facilities in the Gulf Coast, and the company would likely benefit from expansion of these facilities or the addition of new LNG export capacity in the area. The continued conversion of coal-fired to natural gas-fired electricity generation in the U.S. as baseload support for growing intermittent renewable power sources could further increase demand for KMI's natural gas pipelines.

Refined products volumes have returned to pre-COVID levels, except for jet fuel. KMI is expanding its capabilities to handle more renewable diesel, in support of the industry shift towards this product. Fitch expects continued growth in the Products segment in 2023, but uncertainty in global economic conditions and the Russia-Ukraine conflict could disrupt near-term supply/demand dynamics.

Low Customer Credit Risk: KMI's long-distance pipelines have a high-quality customer credit profile. Volatile weather events in recent years, including extreme cold and heat snaps, demonstrate the value of the company's system to its customer base (existing and potential). Despite having few contract renewals in the near term, commodity tailwinds may furnish an opportunity for 'high-grading' an already good customer list.

Increased Capital Spending: Energy security concerns are driving growth in natural gas needed for new LNG export plants in the Gulf Coast region. KMI serves a large part of the area's LNG facilities and is well placed to provide additional service. This has driven capex higher, following a period of reduced spending during 2020-2021. Fitch's capex assumptions over the next two years are higher than pre-pandemic levels but include many smaller, incremental projects, versus large individual projects.

Takeaway capacity out of the Permian basin is tight, and KMI recently completed an expansion of the Permian Highway Pipeline that will push out the need for a new greenfield pipeline for a few years. For new pipeline construction, Fitch expects KMI to target a high percentage of fixed-fee revenue, consistent with current and historical practices.

Stable Leverage: Fitch expects leverage to return to levels approaching management's net leverage target of 4.5x in the medium term. Under Fitch's gross leverage forecast, EBITDA leverage is expected to remain in a range of 4.5x-4.7x over the forecast period vs. 4.5x in 2022. Fitch-calculated gross leverage and management calculated net leverage generally differs between 0.3x and 0.4x.

Key Assumptions

Fitch's price deck for oil and natural gas informs the volume assumptions for certain segments, and, as to unhedged volumes, the price realization in the CO2 segment;

Refined products volumes in the Products segment reflects the Fitch Global Economic Outlook forecast for U.S. GDP growth in 2024;

Performance under existing take-or-pay-type contracts with third-parties produce cashflows consistent with contract parameters;

Contract renewals reflect current market dynamics, as well as current expectations for inflation;

2024 growth and sustaining capital investment, excluding joint venture spending, near management's guidance;

Common share dividend growth and share repurchases in line with management guidance. Share repurchases done based on the company's self-declared opportunistic share repurchase strategy. Fitch expects this to be done in support of KMI's long-term leverage policy target of 4.5x (as defined);

Interest rates affecting the company's variable rate debt instruments, as well as new debt issuances, consistent with Fitch's Global Economic Outlook.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

A meaningful increase in the percentage of EBITDA coming from long-term take-or-pay-type contracts and/or a decrease in the percentage of EBITDA coming from directly commodity price exposed operations;

EBITDA leverage is expected to be below 4.0x on a sustained basis.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

EBITDA leverage forecasted to be sustained at or above 5.0x;

Acquisitions or large growth projects that are not funded in a balanced manner and/or materially increase the business risk of the consolidated entity;

A change to the relative size and constitution of the business segments, which is expected to result in materially greater EBITDA volatility in the long term;

A change in financial policies and priorities that is expected to reduce KMI's credit quality;

Adverse regulatory outcomes.

Liquidity and Debt Structure

Ample Liquidity: KMI's liquidity is supported by its significant cash retention and availability under its revolving credit facilities. The company's primary sources of liquidity are cash from operations and a $3.5 billion revolving credit facility, which supports its $3.5 billion CP program. As of Dec. 31, 2023, KMI had approximately $1.5 billion of liquidity consisting of approximately $83 million of unrestricted cash and $1.4 billion of availability under its credit facility, net of $81 million in letters of credit outstanding. The $3.5 billion credit facility matures in August 2027.

Manageable Maturity Schedule: KMI has approximately $1.9 billion of maturities remaining in 2024 and roughly $1.5 billion due in 2025. Management has indicated it intends to retire or refinance debt as it comes due utilizing its FCF, short-term borrowings or access to capital markets. Fitch believes that KMI will have bond market access and revolver availability to handle the maturities, and management's stated goal of strengthening the balance sheet is consistent with its refinancings and debt retirements over the recent past.

Issuer Profile

Kinder Morgan is one of the largest energy infrastructure companies in North America. It owns the largest natural gas pipeline system in the U.S. The company operates in four segments: Natural Gas pipelines, products pipelines, terminals and CO2, or enhanced oil recovery.

Summary of Financial Adjustments

Fitch typically adjusts midstream energy companies' EBITDA to exclude equity in earnings of unconsolidated affiliates but include cash distributions from unconsolidated affiliates. Fitch supplements this EBITDA in its leverage calculations with an ancillary leverage calculation, which is to include pro-rata EBITDA and pro-rata debt of levered joint ventures. Fitch removes distributions to non-controlling interests from KMI's EBITDA. Leverage metrics are calculated based on gross debt, not net debt.

Date of Relevant Committee

18 August 2023

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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