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3 Anomalies Across Pipeline Equities

1. Kinder Morgan’s Credit Should Be Junk Status

The corporate’s investment-grade credit rating does not add up.

On a reported basis, adjusted for impairments, our estimate for Kinder Morgan’s leverage is 7 times annualized first-half EBITDA, nearly a half turn greater than that of perhaps its closest peer Energy Transfer Equity, which is rated Ba2/BB/BB (Stable) by the credit rating agencies.

That’s two full notches below the lowest level of investment grade and Kinder Morgan’s credit rating, despite Kinder Morgan’s dividend obligations being $350 million more during the first half of this year alone (~$750 million annualized) relative to Energy Transfer Equity, and its absolute level of debt standing above any other on this list. Kinder Morgan’s plans to raise its dividend at a 10% annual clip each year through 2020 should make the corporate’s credit quality worse in this comparison, not better.

As a second data point, Standard & Poor’s assigns a corporate credit rating of BB+ for Williams Co, a company that we estimate as roughly 7+ times net debt to annualized EBITDA on the basis of first-half results. Though Fitch believes Williams’ credit is improving (BBB- ‘Rating Watch Positive’) and Moody’s has Williams’ Co’s ‘Ratings Under Review’ (Baa3), Kinder Morgan’s leverage metrics fall in between ETE’s BB and WMB’s BB+, yet the company is granted a BBB- rating.

Here’s where to find what we’re looking at. To locate Energy Transfer Partners’ credit rating, go to page 3 of the presentation at the June 23, 2015, Credit Suisse conference (a) and underneath Energy Transfer Equity’, L.P, you’ll see the ratings by the agencies, Ba2/BB/BB (Stable). The first-half EBITDA information can be found by downloading each firm’s respective 10-Q, here (b) and here ©, for Kinder Morgan and Energy Transfer Equity, respectively. We add back impairment charges and D&A-related items to operating income to arrive at our measure of adjusted reported EBITDA. Go to William Co’s latest 10-Q (d) to get its data; its corporate credit ratings can be found on page 50. These links are at the end.

All in, at ~7 times net debt-to-annualized adjusted EBITDA, and with double-digit growth in cash dividend obligations expected through 2020, Kinder Morgan’s credit should be rated junk, in our view, especially when compared to Energy Transfer Equity’s metrics, which are a full two notches below those of Kinder Morgan, and those of Williams Co, which are split among the agencies. We’re talking 7 turns of leverage on a company that has commodity-price exposure (e). From an external investor’s perspective, asset quality can probably only be...


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