NEW YORK--(BUSINESS WIRE)--Fitch Ratings rates Colorado Interstate Gas Company, LLC's offering of $375 million in senior unsecured notes 'BBB-.' Proceeds from the notes offering are expected to go towards repaying an intercompany note payable with Kinder Morgan, Inc. (KMI rated 'BBB-'/Stable Outlook) that was incurred to pay off $375 million in maturities of CIG notes during 2015. KMI is expected to use the proceeds from payment of the note payable for debt repayment and general corporate purposes. The CIG notes are subject to the cross guarantees in place amongst and between KMI and its major EBITDA producing subsidiaries. Fitch currently rates CIG as follows:
Colorado Interstate Gas Company, LLC
--Long-Term IDR at 'BBB-';
--Senior unsecured debt at 'BBB-'.
The Ratings Outlook is currently Stable.
CIG's ratings reflect Fitch's consolidated ratings approach to KMI and its various subsidiaries subject to the cross-guarantee agreements. The cross guarantees are joint and several, absolute and unconditional between the entities. KMI's ratings reflect its position as 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. The ratings are supported by KMI's significant cash flow stability, driven by the high percentage of KMI's assets being either fee-based or hedged and Fitch's expectations that KMI's high percentage of fixed fee-generating assets will minimize earnings and cash flow volatility even as oil and gas prices continue to languish and hedges roll off.
CIG's operations are largely fee based with roughly 90% of revenue in 2015 coming from capacity reservation contracts with a weighted average life of six years as of Dec. 31, 2015. Fitch notes that leverage at CIG is relatively low and expected to remain so over the next several years in the 2.3x - 3.0x range. Additionally, the large scale of KMI's natural gas pipeline system offers strategic benefits to CIG and all of KMI's pipelines. KMI is currently the largest midstream infrastructure company in the U.S., possessing a strong, diverse asset portfolio which spans multiple business lines, including the largest interstate natural gas pipeline system in the country allowing access and delivery capability to all of the major gas production and demand regions in the country.
Recontracting risk on the pipeline system remains a concern for CIG and generally for most FERC-regulated interstate natural gas pipelines. Production within the Mid-Continent region of the U.S. that CIG serves is expected to be challenged over the next several years given strained commodity prices and E&P company budgets. Additionally basis spreads are expected to remain compressed across much of the U.S. These factors could impact recontracting on CIG system leading to lower rates or less contracted capacity.
KEY RATING DRIVERS
Guarantees Warrant Consolidated Approach: The cross guarantees are absolute and unconditional between the entities, and any refinancing of maturing notes is expected to be done at the KMI level over time (excepting some pipeline debt which would remain at the pipelines for rate-making purposes but remain cross guaranteed). KMI's rating reflects the removal of the structural subordination, as well as the strong cash flow and operating diversity of its asset base.
Simplified Structure/Structural Equivalence: KMI's November 2014 roll-up of entities into one single creditor class has simplified KMI's corporate structure and provides benefits to KMI's credit profile, in particular by eliminating the structural subordination that limited KMI's ratings to a notching below its operating subsidiaries. Virtually all of the operating cash flow is now available to KMI to fund operations, reduce debt and/or pay dividends, alleviating most structural subordination at KMI. With the dividend cut KMI is now expected to retain excess cash to help fund its growth capital program.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for CIG include:
--CIG remains wholly owned by KMI and subject to the cross guarantees in place.
--All cash available for distribution at CIG assumed to be paid to KMI.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--A meaningful reduction in leverage at the KMI consolidated level, with debt/adjusted EBITDA between 4.5x and 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 KMI's 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.
--Consolidated KMI leverage significantly above 5.5x on a sustained basis. Fitch expects KMI leverage in 2016 at roughly 5.3x to 5.5x, improving closer to 5.0x in 2017 and 2018.
LIQUIDITY
Liquidity Adequate: CIG's working capital needs are relatively minimal and CIG is expected to generate positive free cash flow before any distributions up to KMI. Any additional liquidity needs would be expected to be provided by KMI. KMI's liquidity is adequate, supported by its $5 billion revolving credit facility, which as of June 30, 2016 had roughly $4.1 billion in availability. CIG's maturities are manageable with no near term debt maturities until this current offering becomes due in 2026.
SUMMARY OF FINANCIAL STATEMENT ADJUSTMENTS
Fitch has made no material adjustments that are not disclosed within the company's public filings.
FULL LIST OF RATING ACTIONS
Fitch rates CIG's $375 million in senior unsecured notes due 2026 'BBB-.'
Date of Relevant Rating Committee: [Dec. 8, 2015]
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010247
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